UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.DC 20549
FORM 10-Q
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020July 2, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to ____________________to__________
Commission File No. file number: 001-39599
EMPOWER LTD.
HOLLEY INC.
(Exact name of registrant as specified in its charter)
Delaware | 87-1727560 | |
(State or other jurisdiction of | (I.R.S. Employer |
c/o MidOcean Partners245 Park Avenue, 38th FloorNew York, NY 10167
1801 Russellville Road, Bowling Green, KY 42101
(Address of Principal Executive Offices, including zip code)principal executive offices)
(212) 497-1400
(270) 782-2900
(Registrant’sRegistrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report) N/A
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol(s) | Name of each exchange on which registered | ||
Common Stock, par value Warrants to purchase common stock | HLLY HLLY WS | New York Stock Exchange | ||
New York Stock Exchange | ||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐☒ No ☒☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ☐ | Accelerated filer | ||||
☒ | ||||||
Non-accelerated filer | ☐ | Smaller reporting company | ☐ | |||
Emerging growth company | ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2Rule12b-2 of the Exchange Act):. Yes ☒☐ No ☐☒
AsThere were 118,343,604 shares of November 19, 2020, there were 25,000,000 Class A ordinaryCommon Stock, including 1,093,750 restricted earn-out shares, $0.0001 par value per share, and 7,187,500 Class B ordinary shares, $0.0001 par value per share, issued and outstanding.outstanding as of August 4, 2023.
EMPOWER LTD.
FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2020
i
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act") that are intended to enjoy the protection of the safe harbor for forward-looking statements provided by the Securities Act and Exchange Act, as well as protections afforded by other federal securities laws. These forward-looking statements relate to expectations for future financial performance, business strategies or expectations for the Company’s business. Forward-looking statements may be accompanied by words such as “believe,” “estimate,” “expect,” “project,” “forecast,” “may,” “will,” “should,” “seek,” “plan,” “scheduled,” “anticipate,” “intend” or similar expressions. These forward-looking statements are subject to various risks and uncertainties, many of which are outside our control. Therefore, you should not place undue reliance on such statements. Actual results could differ materially due to numerous factors, including but not limited to the Company’s ability to do any of the following:
• | execute its business strategy, including monetization of services provided and expansions in and into existing and new lines of business; |
• | anticipate and manage through disruptions and higher costs in manufacturing, supply chain, logistical operations, and shortages of certain company products in distribution channels; |
• | anticipate and manage through supply shortages of key component parts used in our products and the need to shift the mix of products offered in response thereto; |
• | respond to interruption from catastrophic events and problems such as terrorism, public health crises, cyber-attacks, or failure of key information technology systems; |
• | maintain key strategic relationships with partners and resellers; |
• | anticipate and manage through the impact of elevated interest rate levels, which cause the cost of capital to increase, as well as respond to inflationary pressures; |
• | enhance future operating and financial results; |
• | respond to uncertainties associated with product and service development and market acceptance; |
• | anticipate and manage through increased constraints in consumer demand and/or shifts in the mix of products sold; |
• | attract and retain qualified employees and key personnel; |
• | protect and enhance the Company’s corporate reputation and brand awareness; |
• | recognition of goodwill and other intangible asset impairment charges; |
• | effectively respond to general economic and business conditions; |
• | acquire and protect intellectual property; |
• | collect, store, process and use personal and payment information and other consumer data; |
• | comply with privacy and data protection laws and other legal obligations related to privacy, information security, and data protection; |
• | meet future liquidity requirements and comply with restrictive covenants related to long-term indebtedness; |
• | obtain additional capital, including use of the debt market; |
• | manage to finance operations on an economically viable basis; |
• | maintain Holley’s New York Stock Exchange (“NYSE”) listing of its common stock (“Common Stock”) and warrants to purchase Common Stock (“Warrants”); |
• | comply with existing and/or future laws and regulations applicable to its business, including laws and regulations related to environmental health and safety; |
• | respond to litigation, complaints, product liability claims and/or adverse publicity; |
• | anticipate the significance and timing of contractual obligations; |
• | anticipate the impact of, and response to, new accounting standards; |
• | maintain proper and effective internal controls; |
• | respond to the impact of changes in U.S. tax laws and regulations, including the impact on deferred tax assets; |
• | anticipate the time during which we will be an emerging growth company under the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”); |
• | anticipate the impact of changes in consumer spending patterns, consumer preferences, local, regional and national economic conditions, crime, weather, and demographic trends; and |
• | respond to other risks and factors, listed under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the U.S. Securities and Exchange Commission (the "SEC") on March 15, 2023, in Part II. Item 1A of this Quarterly Report on Form 10-Q, and/or as disclosed in any subsequent filings with the SEC. |
Forward-looking statements are based on information available as of the date of this Quarterly Report on Form 10-Q and our management’s expectations, forecasts and assumptions, and involve a number of judgements, risks and uncertainties, and actual results, developments and business decisions may differ materially from those envisaged by such forward-looking statements. Accordingly, forward-looking statements should not be relied upon as representing our views as of any subsequent date. We undertake no obligation to update forward-looking statements to reflect events or circumstances after the date they were made, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.
CONDENSED BALANCE SHEET
SEPTEMBER 30, 2020
(Unaudited)– FINANCIAL INFORMATION
ASSETS | | |||
Deferred offering costs | $ | 165,893 | ||
TOTAL ASSETS | $ | 165,893 | ||
LIABILITIES AND SHAREHOLDER’S EQUITY | | |||
Current liabilities | | |||
Promissory note – related party | $ | 145,893 | ||
Total Current Liabilities | 145,893 | |||
Commitments | | |||
Shareholder’s Equity | | |||
Preferred shares, $0.0001 par value; 5,000,000 shares authorized; none issued and outstanding | — | |||
Class A ordinary shares, $0.0001 par value; 500,000,000 shares authorized; none issued and outstanding | — | |||
Class B ordinary shares, $0.0001 par value; 50,000,000 shares authorized; 7,187,500 shares issued and outstanding (1) | 719 | |||
Additional paid-in capital | 24,281 | |||
Accumulated deficit | (5,000 | ) | ||
Total Shareholder’s Equity | 20,000 | |||
TOTAL LIABILITIES AND SHAREHOLDER’S EQUITY | $ | 165,893 |
HOLLEY INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
ASSETS | ||||||||
Cash and cash equivalents | $ | 42,740 | $ | 26,150 | ||||
Accounts receivable, less allowance for credit losses of $2,092 and $1,550 respectively | 57,080 | 47,083 | ||||||
Inventory | 217,504 | 233,573 | ||||||
Prepaids and other current assets | 15,951 | 18,157 | ||||||
Total current assets | 333,275 | 324,963 | ||||||
Property, plant, and equipment, net | 49,691 | 52,181 | ||||||
Goodwill | 419,056 | 418,121 | ||||||
Other intangibles assets, net | 417,613 | 424,855 | ||||||
Right-of-use assets | 28,965 | 29,522 | ||||||
Other noncurrent assets | 2,068 | — | ||||||
Total assets | $ | 1,250,668 | $ | 1,249,642 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
Accounts payable | $ | 43,774 | $ | 44,948 | ||||
Accrued interest | 6,261 | 5,994 | ||||||
Accrued liabilities | 46,605 | 43,317 | ||||||
Current portion of long-term debt | 6,571 | 7,000 | ||||||
Total current liabilities | 103,211 | 101,259 | ||||||
Long-term debt, net of current portion | 629,435 | 643,563 | ||||||
Warrant liability | 7,725 | 4,272 | ||||||
Earn-out liability | 2,565 | 1,176 | ||||||
Deferred taxes | 47,727 | 58,390 | ||||||
Long-term operating lease liabilities | 24,589 | 24,992 | ||||||
Total liabilities | 815,252 | 833,652 | ||||||
Commitments and contingencies (Refer to Note 18 - Commitments and Contingencies) | ||||||||
Stockholders' equity: | ||||||||
Preferred stock, $0.0001 par value, 5,000,000 shares authorized, none issued and outstanding on July 2, 2023 and December 31, 2022 | — | — | ||||||
Common stock, $0.0001 par value, 550,000,000 shares authorized, 117,249,854 and 117,147,997 shares issued and outstanding on July 2, 2023 and December 31, 2022, respectively | 12 | 12 | ||||||
Additional paid-in capital | 370,249 | 368,122 | ||||||
Accumulated other comprehensive loss | (871 | ) | (944 | ) | ||||
Retained earnings | 66,026 | 48,800 | ||||||
Total stockholders' equity | 435,416 | 415,990 | ||||||
Total liabilities and stockholders' equity | $ | 1,250,668 | $ | 1,249,642 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
CONDENSED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM AUGUST 19, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020
(Unaudited)
Formation costs | $ | 5,000 | ||
Net Loss | $ | (5,000 | ) | |
Weighted average shares outstanding, basic and diluted (1) | 6,250,000 | |||
Basic and diluted net loss per ordinary share | $ | (0.00 | ) |
HOLLEY INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(unaudited)
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Net sales | $ | 175,262 | $ | 179,420 | $ | 347,467 | $ | 379,475 | ||||||||
Cost of goods sold | 105,514 | 104,132 | 210,006 | 221,466 | ||||||||||||
Gross profit | 69,748 | 75,288 | 137,461 | 158,009 | ||||||||||||
Selling, general, and administrative | 29,101 | 36,269 | 59,118 | 70,611 | ||||||||||||
Research and development costs | 6,182 | 8,196 | 12,835 | 16,357 | ||||||||||||
Amortization of intangible assets | 3,674 | 3,662 | 7,353 | 7,323 | ||||||||||||
Acquisition and restructuring costs | 352 | 1,691 | 1,691 | 1,981 | ||||||||||||
Other operating expense | 485 | 325 | 536 | 547 | ||||||||||||
Total operating expense | 39,794 | 50,143 | 81,533 | 96,819 | ||||||||||||
Operating income | 29,954 | 25,145 | 55,928 | 61,190 | ||||||||||||
Change in fair value of warrant liability | 2,017 | (23,168 | ) | 3,452 | (20,941 | ) | ||||||||||
Change in fair value of earn-out liability | 961 | (4,234 | ) | 1,389 | (1,853 | ) | ||||||||||
Interest expense | 9,899 | 8,961 | 28,197 | 16,352 | ||||||||||||
Total non-operating expense (income) | 12,877 | (18,441 | ) | 33,038 | (6,442 | ) | ||||||||||
Income before income taxes | 17,077 | 43,586 | 22,890 | 67,632 | ||||||||||||
Income tax expense | 4,098 | 3,023 | 5,664 | 10,211 | ||||||||||||
Net income | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||
Comprehensive income: | ||||||||||||||||
Foreign currency translation adjustment | 272 | 501 | 73 | 742 | ||||||||||||
Total comprehensive income | $ | 13,251 | $ | 41,064 | $ | 17,299 | $ | 58,163 | ||||||||
Common Share Data: | ||||||||||||||||
Weighted average common shares outstanding - basic | 117,221,419 | 116,931,623 | 117,187,287 | 116,398,177 | ||||||||||||
Weighted average common shares outstanding - diluted | 117,868,922 | 117,114,553 | 117,556,657 | 117,343,975 | ||||||||||||
Basic net income per share | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.49 | ||||||||
Diluted net income per share | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.31 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
HOLLEY INC.
CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDER’SSTOCKHOLDERS' EQUITY
FOR THE PERIOD FROM AUGUST 19, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020(in thousands, except share data)
(Unaudited)(unaudited)
Class B Ordinary Shares | Additional Paid-in | Accumulated | Total Shareholder’s | |||||||||||||||||
�� | Shares | Amount | Capital | Deficit | Equity | |||||||||||||||
Balance – August 19, 2020 (inception) | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
Issuance of Class B ordinary shares to Sponsor (1) | 7,187,500 | 719 | 24,281 | — | 25,000 | |||||||||||||||
Net loss | — | — | — | (5,000 | ) | (5,000 | ) | |||||||||||||
Balance – September 30, 2020 | 7,187,500 | $ | 719 | $ | 24,281 | $ | (5,000 | ) | $ | 20,000 |
Common Stock | Accumulated | Retained | ||||||||||||||||||||||
Additional | Other | Earnings | ||||||||||||||||||||||
Paid-In | Comprehensive | (Accumulated | ||||||||||||||||||||||
Shares | Amount | Capital | Gain (Loss) | Deficit) | Total | |||||||||||||||||||
Balance at December 31, 2021 | 115,805,639 | $ | 12 | $ | 329,705 | $ | (256 | ) | $ | (24,974 | ) | $ | 304,487 | |||||||||||
Net income | — | — | — | — | 16,858 | 16,858 | ||||||||||||||||||
Equity compensation | — | — | 3,162 | — | — | 3,162 | ||||||||||||||||||
Foreign currency translation | — | — | — | 241 | — | 241 | ||||||||||||||||||
Issuance of vested Earn-out Shares | 1,093,750 | — | 14,689 | — | — | 14,689 | ||||||||||||||||||
Balance at April 3, 2022 | 116,899,389 | 12 | 347,556 | (15 | ) | (8,116 | ) | 339,437 | ||||||||||||||||
Net income | — | — | — | — | 40,563 | 40,563 | ||||||||||||||||||
Equity compensation | — | — | 3,483 | — | — | 3,483 | ||||||||||||||||||
Foreign currency translation | — | — | — | 501 | — | 501 | ||||||||||||||||||
Warrants exercised | 33,333 | — | 383 | — | — | 383 | ||||||||||||||||||
Balance at July 3, 2022 | 116,932,722 | $ | 12 | $ | 351,422 | $ | 486 | $ | 32,447 | $ | 384,367 | |||||||||||||
Balance at December 31, 2022 | 117,147,997 | $ | 12 | $ | 368,122 | $ | (944 | ) | $ | 48,800 | $ | 415,990 | ||||||||||||
Net income | — | — | — | — | 4,247 | 4,247 | ||||||||||||||||||
Equity compensation | — | — | 394 | — | — | 394 | ||||||||||||||||||
Foreign currency translation | — | — | — | (199 | ) | — | (199 | ) | ||||||||||||||||
Tax withholding related to vesting of restricted stock units | — | — | (34 | ) | — | — | (34 | ) | ||||||||||||||||
Issuance of shares for restricted stock units | 24,219 | — | — | — | — | — | ||||||||||||||||||
Balance at April 2, 2023 | 117,172,216 | 12 | 368,482 | (1,143 | ) | 53,047 | 420,398 | |||||||||||||||||
Net income | — | — | — | — | 12,979 | 12,979 | ||||||||||||||||||
Equity compensation | — | — | 1,806 | — | — | 1,806 | ||||||||||||||||||
Foreign currency translation | — | — | — | 272 | — | 272 | ||||||||||||||||||
Tax withholding related to vesting of restricted stock units | — | — | (39 | ) | — | — | (39 | ) | ||||||||||||||||
Issuance of shares for restricted stock units | 77,638 | — | — | — | — | — | ||||||||||||||||||
Balance at July 2, 2023 | 117,249,854 | $ | 12 | $ | 370,249 | $ | (871 | ) | $ | 66,026 | $ | 435,416 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
HOLLEY INC.
CONDENSED STATEMENTCONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM AUGUST 19, 2020 (INCEPTION) THROUGH SEPTEMBER 30, 2020(in thousands)
(Unaudited)(unaudited)
Cash Flows from Operating Activities: | ||||
Net loss | $ | (5,000 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | ||||
Payment of formation costs through issuance of Class B ordinary shares | 5,000 | |||
Net cash used in operating activities | — | |||
Cash Flows from Financing Activities: | ||||
Proceeds from promissory note - related party | 145,893 | |||
Payment of offering costs | (145,893 | ) | ||
Net cash provided by financing activities | — | |||
Net Change in Cash | — | |||
Cash – Beginning | — | |||
Cash – Ending | $ | — | ||
Non-cash investing and financing activities: | ||||
Deferred offering costs paid by Sponsor in exchange for the issuance of Class B ordinary shares | $ | 20,000 |
For the twenty-six weeks ended | ||||||||
July 2, 2023 | July 3, 2022 | |||||||
OPERATING ACTIVITIES: | ||||||||
Net income | $ | 17,226 | $ | 57,421 | ||||
Adjustments to reconcile net income to net cash from operating activities: | ||||||||
Depreciation | 4,953 | 4,663 | ||||||
Amortization of intangible assets | 7,353 | 7,323 | ||||||
Amortization of deferred loan costs | 901 | 846 | ||||||
Amortization of right of use assets | 2,707 | 2,753 | ||||||
Gain on termination of leases | — | (279 | ) | |||||
Fair value adjustments to warrant liability | 3,452 | (20,941 | ) | |||||
Fair value adjustments to earn-out liability | 1,389 | (1,853 | ) | |||||
Fair value adjustments to interest rate collar | (2,068 | ) | — | |||||
Equity compensation | 2,200 | 6,645 | ||||||
Change in deferred taxes | (10,663 | ) | (1,090 | ) | ||||
Loss on disposal of property, plant and equipment | 69 | 336 | ||||||
Provision for inventory reserves | 2,973 | 2,787 | ||||||
Provision for credit losses | 717 | 145 | ||||||
Change in operating assets and liabilities: | ||||||||
Accounts receivable | (10,707 | ) | (6,343 | ) | ||||
Inventories | 11,691 | (29,483 | ) | |||||
Prepaids and other current assets | 2,239 | 3,838 | ||||||
Accounts payable | (1,337 | ) | (5,778 | ) | ||||
Accrued interest | 267 | 484 | ||||||
Accrued and other liabilities | 1,021 | (643 | ) | |||||
Net cash provided by operating activities | 34,383 | 20,831 | ||||||
INVESTING ACTIVITIES: | ||||||||
Capital expenditures | (2,738 | ) | (9,609 | ) | ||||
Proceeds from the disposal of fixed assets | 356 | 244 | ||||||
Cash paid for acquisitions, net | — | (14,077 | ) | |||||
Net cash used in investing activities | (2,382 | ) | (23,442 | ) | ||||
FINANCING ACTIVITIES: | ||||||||
Proceeds from issuance of long-term debt | — | 27,000 | ||||||
Principal payments on long-term debt | (14,072 | ) | (30,099 | ) | ||||
Deferred financing fees | (1,427 | ) | — | |||||
Payments from stock-based award activities | (73 | ) | — | |||||
Proceeds from issuance of common stock in connection with the exercise of Warrants | — | 383 | ||||||
Net cash used in financing activities | (15,572 | ) | (2,716 | ) | ||||
Effect of foreign currency rate fluctuations on cash | 161 | (443 | ) | |||||
Net change in cash and cash equivalents | 16,590 | (5,770 | ) | |||||
Cash and cash equivalents: | ||||||||
Beginning of period | 26,150 | 36,325 | ||||||
End of period | $ | 42,740 | $ | 30,555 | ||||
Supplemental disclosures of cash flow information: | ||||||||
Cash paid for interest | $ | 29,097 | $ | 16,005 | ||||
Cash paid for income taxes | 12,021 | 4,276 | ||||||
Noncash investing and financing activities: | ||||||||
Vested Earn-out Shares issued to Empower Sponsor Holdings LLC | $ | — | $ | 14,689 |
The accompanying notes are an integral part of the unaudited condensed consolidatedfinancial statements.
1. | DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION, AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
NOTE 1. DESCRIPTION OF ORGANIZATION AND BUSINESS OPERATIONS
Empower Ltd.Holley Inc., a Delaware corporation headquartered in Bowling Green, Kentucky (the “Company” or “Holley”) is a blank check company incorporated as a Cayman Islands exempted company on August 19, 2020. The Company was formed for the purpose, conducts operations through its wholly owned subsidiaries. These operating subsidiaries are comprised of effecting a merger, share exchange, asset acquisition, share purchase, reorganization or similar business combination with one or more businessesHolley Performance Products Inc. (“Business Combination”Holley Performance”)., Hot Rod Brands, Inc. (“Hot Rod Brands”), Simpson Safety Solutions, Inc., B&M Racing and Performance Products, Inc., and Speedshop.com, Inc.
The Company is not limitedconsummated a business combination (the “Business Combination”) pursuant to a particular industry or geographic region for purposesthat certain Agreement and Plan of completing a Business Combination. The Company is an early stage and emerging growth company and, as such, Merger dated March 11, 2021 (the Company is subject to all of the risks associated with early stage and emerging growth companies.
As of September 30, 2020, the Company had not commenced any operations. All activity for the period from August 19, 2020 (inception) through September 30, 2020 relates to the Company’s formation and the initial public offering (“Initial Public Offering”“Merger Agreement”), which is described below.by and among Empower Ltd., (“Empower”), Empower Merger Sub I Inc., Empower Merger Sub II LLC, and Holley Intermediate Holdings, Inc. (“Holley Intermediate”) on July 16, 2021, (the “Closing” and such date, the “Closing Date”). The Company will not generate any operating revenues until after the completion of a Business Combination at the earliest. The Company will generate non-operating income in the form of interest income from the proceeds derived from the Initial Public Offering.
The registration statementwas accounted for the Company’s Initial Public Offering became effective on October 6, 2020. On October 9, 2020, the Company consummated the Initial Public Offering of 25,000,000 units (the “Units” and, with respect to the Class A ordinary shares included in the Units sold, the “Public Shares”), at $10.00 per Unit, generating gross proceeds of $250,000,000 which is described in Note 3.
Simultaneously with the closing of the Initial Public Offering, the Company consummated the sale of 4,666,667 warrants (the “Private Placement Warrants”) at a price of $1.50 per Private Placement Warrant in a private placement to Empower Sponsor Holdings LLC (the “Sponsor”), generating gross proceeds of $7,000,000, which is described in Note 4.
Transaction costs amounted to $14,215,163, consisting of $5,000,000 of underwriting fees, $8,750,000 of deferred underwriting fees and $465,163 of other offering costs. In addition, at October 9, 2020, cash of $1,122,742 was held outside of the Trust Account (as defined below) and is available for the payment of offering expenses and for working capital purposes.
Following the closing of the Initial Public Offering on October 9, 2020, an amount of $250,000,000 ($10.00 per Unit) from the net proceeds of the sale of the Units in the Initial Public Offering and the sale of the Private Placement Warrants was placed in a trust account (the “Trust Account”) and invested in U.S. government securities, within the meaning set forth in Section 2(a)(16) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), with a maturity of 185 days or less, or in any open-ended investment company that holds itself out as a money market fund meeting certain conditions of Rule 2a-7 ofreverse recapitalization in which Holley Intermediate was deemed the Investment Company Act,accounting acquirer with Holley Inc. as determined by the Company, untilsuccessor registrant. As such, Empower was treated as the earlier of: (i)acquired company for financial reporting purposes. On the completion of a Business CombinationClosing Date, Empower changed its name to Holley Inc. and (ii)its trading symbol on the distribution of the funds in the Trust AccountNew York Stock Exchange (the “NYSE”) from “EMPW” to the Company’s shareholders, as described below.
The Company’s management has broad discretion with respect to the specific application of the net proceeds of the Initial Public Offering and the sale of the Private Placement Warrants, although substantially all of the net proceeds are intended to be applied generally toward completing a Business Combination. The Company must complete its initial Business Combination with one or more target businesses that together have a fair market value equal to at least 80% of the net assets held in the Trust Account (excluding any deferred underwriting commissions held in the Trust Account) at the time of the agreement to enter into a Business Combination. The Company will only complete a Business Combination if the post-Business Combination company owns or acquires 50% or more of the issued and outstanding voting securities of the target or otherwise acquires a controlling interest in the target business sufficient for it not to be required to register as an investment company under the Investment Company Act. There is no assurance that the Company will be able to successfully effect a Business Combination.“HLLY.”
The Company will provide its shareholders with the opportunitydesigns, manufactures and distributes performance automotive products to redeem all or a portion of their Public Shares upon the completion of a Business Combination either (i) in connection with a shareholder meeting called to approve the Business Combination or (ii) by means of a tender offer. The decision as to whether the Company will seek shareholder approval of a Business Combination or conduct a tender offer will be made by the Company. The shareholders will be entitled to redeem their shares for a pro rata portion of the amount held in the Trust Account (initially $10.00 per share), calculated as of two business days prior to the completion of a Business Combination, including any pro rata interest earned on the funds held in the Trust Account and not previously released to the Company to pay its tax obligations. There will be no redemption rights upon the completion of a Business Combination with respect to the Company’s warrants.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
If the Company seeks shareholder approval in connection with a Business Combination, it receives an ordinary resolution under Cayman Islands law approving a Business Combination, which requires the affirmative vote of a majority of the shareholders who vote at a general meeting of the Company. If a shareholder vote is not required under applicable law or stock exchange listing requirements and the Company does not decide to hold a shareholder vote for business or other reasons, the Company will, pursuant to its Amended and Restated Memorandum and Articles of Association, conduct the redemptions pursuant to the tender offer rules of the Securities and Exchange Commission (“SEC”), and file tender offer documents containing substantially the same information as would be included in a proxy statement with the SEC prior to completing a Business Combination. If the Company seeks shareholder approval in connection with a Business Combination, the Sponsor has agreed to vote its Founder Shares (as defined in Note 5) and any Public Shares purchased in or after the Initial Public Offering in favor of approving a Business Combination and to waive its redemption rights with respect to any such shares in connection with a shareholder vote to approve a Business Combination. However, in no event will the Company redeem its Public Shares in an amount that would cause its net tangible assets to be less than $5,000,001. Additionally, each public shareholder may elect to redeem its Public Shares, without voting, and if they do vote, irrespective of whether they vote for or against a proposed Business Combination.
Notwithstanding the foregoing, if the Company seeks shareholder approval of a Business Combination and it does not conduct redemptions pursuant to the tender offer rules, the Company’s Amended and Restated Memorandum and Articles of Association provides that a public shareholder, together with any affiliate of such shareholder or any other person with whom such shareholder is acting in concert or as a “group” (as defined under Section 13 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), will be restricted from redeeming its shares with respect to more than an aggregate of 15% of the Public Shares without the Company’s prior written consent.
The Sponsor has agreed (a) to waive its redemption rights with respect to any Founder Shares and Public Shares held by it in connection with the completion of a Business Combination and (b) not to propose an amendment to the Amended and Restated Memorandum and Articles of Association (i) to modify the substance or timing of the Company’s obligation to redeem 100% of the Public Shares if the Company does not complete a Business Combination within the Combination Period (as defined below) or (ii) with respect to any other provision relating to shareholders’ rights or pre-initial business combination activity, unless the Company provides the public shareholders with the opportunity to redeem their Public Shares in conjunction with any such amendment and (iii) to waive its rights to liquidating distributions from the Trust Account with respect to the Founder Shares if the Company fails to complete a Business Combination.
The Company will have until October 9, 2022 (the “Combination Period”) to complete a Business Combination. If the Company is unable to complete a Business Combination within the Combination Period, the Company will (i) cease all operations except for the purpose of winding up, (ii) as promptly as reasonably possible but no more than 10 business days thereafter, redeem 100% of the outstanding Public Shares, at a per-share price, payable in cash, equal to the aggregate amount then on deposit in the Trust Account, including interest earned (less up to $100,000 of interest to pay dissolution expenses and net of taxes payable), divided by the number of then outstanding Public Shares, which redemption will completely extinguish public shareholders’ rights as shareholders (including the right to receive further liquidation distributions, if any), and (iii) as promptly as reasonably possible following such redemption, subject to the approval of the remaining shareholders and the Company’s board of directors, dissolve and liquidate, subject in each case to its obligations under Cayman Islands law to provide for claims of creditors and the requirements of other applicable law.
The Sponsor has agreed to waive its liquidation rights with respect to the Founder Shares if the Company fails to complete a Business Combination within the Combination Period. However, if the Sponsor acquires Public Shares in or after the Initial Public Offering, such Public Shares will be entitled to liquidating distributions from the Trust Account if the Company fails to complete a Business Combination within the Combination Period. The underwriters have agreed to waive their rights to their deferred underwriting commission (see Note 6) held in the Trust Account in the event the Company does not complete a Business Combination within the Combination Period and, in such event, such amounts will be included with the funds held in the Trust Account that will be available to fund the redemption of the Public Shares. In the event of such distribution, it is possible that the per share value of the assets remaining available for distribution will be less than the Initial Public Offering price per Unit ($10.00).
The Sponsor has agreed that it will be liable to the Company, if and to the extent any claims by a third party for services rendered or products sold to the Company, or by a prospective target business with which the Company has discussed entering into a transaction agreement, reduce the amount of funds in the Trust Account to below (1) $10.00 per Public Share or (2) such lesser amount per Public Share held in the Trust Account as of the date of the liquidation of the Trust Account due to reductions in the value of trust assets, in each case net of the amount of interest which may be withdrawn to pay taxes. This liability will not apply with respect to any claims by a third party who executed a waiver of any and all rights to seek access to the Trust Account nor will it apply to any claims under the Company’s indemnity of the underwriters of the Initial Public Offering against certain liabilities, including liabilities under the Securities Act of 1933, as amended (the “Securities Act”). Moreover, in the event that an executed waiver is deemed to be unenforceable against a third party, the Sponsor will not be responsible to the extent of any liability for such third-party claims. The Company will seek to reduce the possibility that the Sponsor will have to indemnify the Trust Account due to claims of creditors by endeavoring to have all vendors, service providers (other than the Company’s independent auditors), prospective target businesses or other entities with which the Company does business, execute agreements with the Company waiving any right, title, interest or claim of any kind in or to monies held in the Trust Account.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally acceptedcustomers primarily in the United States, of America (“GAAP”) for interim financial informationCanada and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X of the Securities and Exchange Commission (the “SEC”). Certain information or footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary forEurope. The Company is a complete presentation of financial position, results of operations, or cash flows. In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consistingleading manufacturer of a normal recurring nature, which are necessary fordiversified line of performance automotive products, including carburetors, fuel pumps, fuel injection systems, nitrous oxide injection systems, superchargers, exhaust headers, mufflers, distributors, ignition components, engine tuners and automotive performance plumbing products. The Company is also a fair presentationleading manufacturer of the financial position, operating results and cash flows for the periods presented.
The accompanying unaudited condensed financial statements should be read in conjunction with the Company’s prospectus for its Initial Public Offering as filed with the SEC on October 7, 2020,exhaust products as well as shifters, converters, transmission kits, transmissions, tuners and automotive software. The Company’s products are designed to enhance street, off-road, recreational and competitive vehicle performance through increased horsepower, torque and drivability. The Company has locations in the Company’s Current Reports on Form 8-K, as filed with the SEC on October 13, 2020United States, Canada, Italy and October 16, 2020. The interim results for the period from August 19, 2020 (inception) through September 30, 2020 are not necessarily indicative of the results to be expected for the year ending December 31, 2020 or for any future periods.China.
Emerging Growth Company Status
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”102(b)(1), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the independent registered public accounting firm attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparisonand, as such, has elected to take advantage of the Company’s financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted outbenefits of using the extended transition period difficultfor new or impossible because of the potential differences inrevised financial accounting standards used.standards.
Use of Estimates
Risks and Uncertainties
The preparationCompany's business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, specifically the conflict in Ukraine. The Company's operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, the Company has attempted to minimize potential adverse impacts on its business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with its suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales to lower-margin products, and demands on our performance that increase our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if the Company's attempt to mitigate the impact on its supply chain, operations and costs is not successful, the Company’s business, results of operations and financial condition may be adversely affected.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP" or “GAAP”) and applicable rules and regulations of the SEC regarding interim financial reporting. Certain information and footnote disclosures normally included in the financial statements prepared in conformityaccordance with U.S. GAAP requires managementhave been condensed or omitted pursuant to make estimatessuch rules and assumptions that affectregulations. Accordingly, these interim condensed consolidated financial statements should be read in conjunction with the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of theCompany's audited consolidated financial statements and notes thereto for the reported amountsyear ended December 31, 2022, as filed with the SEC on March 15, 2023, in the Company’s annual report on Form 10-K. In management’s opinion, the unaudited interim condensed consolidated financial statements reflect all adjustments, which are of revenuesa normal and expenses duringrecurring nature, that are necessary for a fair presentation of financial results for the reporting period.
Making estimates requires management to exercise significant judgment. It is at least reasonably possible that the estimateinterim periods presented. Operating results for any quarter are not necessarily indicative of the effect of a condition, situation or set of circumstances that existed atresults for the date of the financial statements, which management considered in formulating its estimate, could change in the near term due to one or more future confirming events. Accordingly, the actual results could differ significantly from those estimates.
Cash and Cash Equivalentsfull fiscal year.
The Company considers all short-term investments with an original maturityoperates on a fiscal year that ends on December 31, 2023 and 2022. The three- and six-month periods ended July 2, 2023 and July 3, 2022 each included 13 weeks and 26 weeks, respectively.
Principles of three months or less when purchasedConsolidation
These unaudited condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany transactions and accounts have been eliminated in consolidation.
Summary of Significant Accounting Policies
The following are updates to be cash equivalents. The Company did not have any cash equivalentsthe significant accounting policies described in our audited consolidated financial statements as of September 30, 2020.and for the year ended December 31, 2022.
Deferred Offering Costs
Offering costs consist of legal, accounting and other costs incurred through the balance sheet date that are directly related to the Initial Public Offering. Offering costs amounting to $14,215,163 were charged to shareholders’ equity upon the completion of the Initial Public Offering.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
Income TaxesEquity-Based Compensation
The Company accounts for income taxesequity-based awards granted to employees and nonemployees under ASC 740, “Income Taxes” (“ASC 740”the fair value method prescribed by Accounting Standards Codification ("ASC") Subtopic 718-10, Stock Compensation. Equity-based compensation cost is measured based on the estimated grant date fair value of the award and is recognized as expense over the requisite service period (generally the vesting period). ASC 740 requiresThe fair value of stock options is estimated using the recognitionBlack Scholes option-pricing model. Restricted stock units are valued at the stock price on the grant date. The fair value of deferred tax assets and liabilitiesprofit interest units ("PIUs") granted by Holley Parent Holdings, LLC (the "Holley Stockholder") is estimated based on the Company’s estimated equity value for botheach unit class at the time of granting using the Black-Scholes option-pricing model, discounted to reflect market considerations for illiquidity.
Performance share units that vest based on the achievement of company-designated performance targets are valued at the stock price on the grant date. Compensation expense in respect of such performance share units is recognized each period based on the expected impactlevel of differences betweenachievement and, to the financial statements and tax basisextent that the expected levels of assets and liabilities andachievement change, compensation cost is adjusted in the period of change with the remaining unrecognized cost recognized over the remaining requisite service period. For performance share units that vest based on the achievement of predetermined market conditions, the Company estimates the grant date fair value using a Monte Carlo simulation model.The fair value associated with each tranche of the award is recognized, straight-line, over the associated requisite service period for that tranche, subject to acceleration if the market condition is met prior to the end of the derived service period.
Unless the awards contain a market condition, previously recognized expense related to forfeited awards is reversed in the period in which the forfeiture occurs. For awards containing a market condition, previously recognized stock-based compensation expense is not reversed when the awards are forfeited as long as the service is provided for the expected future tax benefit to be derived from tax loss and tax credit carry forwards. ASC 740 additionally requires a valuation allowance to be established when it is more likely than not that all or a portionduration of deferred tax assets will not be realized.the required service period.
ASC 740 also clarifies the accounting for uncertainty
Derivative Financial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives in accordance with ASC Topic 815, Derivatives and Hedging. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is considered an exempted Cayman Islands Companyinitially recorded at its fair value on the grant date and is presently then re-valued at each reporting date, with changes in the fair value reported in the statements of operations. Derivative liabilities are classified on the balance sheet as current or non-current based on whether or not net cash settlement or conversion of the instrument could be required within 12 months of the balance sheet date.
The Company uses derivative instruments to manage its exposure to changes in interest rates on borrowings under its debt facility. These derivative instruments are primarily valued on the basis of quotes obtained from banks, brokers, and/or dealers. The valuation of the derivative instruments considers future expected interest rates on the notional principal balance remaining, which is comparable to what a prospective acquirer would pay on the measurement date. Valuation pricing models consider inputs such as forward rates, anticipated interest rate volatility relating to the reference rate, as well as time value, counterparty risk and other factors underlying derivative instruments.
Recent Accounting Pronouncements
Accounting Standards Recently Adopted
In October 2021, the Financial Accounting Standards Board issued Accounting Standards Update ("ASU") 2021-08,Business Combinations (Topic 805):Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. This ASU requires entities to apply the definition of a performance obligation under ASC Topic 606,Revenue from Contracts with Customers, to recognize and measure contract assets and contract liabilities (i.e., deferred revenue) relating to contracts with customers that are acquired in a business combination. Prior to the adoption of ASU 2021-08, an acquirer generally recognized assets acquired, and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. ASU No.2021-08 results in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC Topic 606. The Company adopted ASU 2021-08 on January 1, 2023. Adoption of ASU 2021-08 did not impact the Company's consolidated financial statements.
2. | ACQUISITIONS |
In 2022, the Company completed three acquisitions. These acquisitions are expected to enhance the Company's portfolio of products and services in the automotive aftermarket and automotive safety solutions market.
The Company accounts for acquisitions using the acquisition method, and accordingly, the purchase price has been allocated based upon the fair value of the assets acquired and liabilities assumed. The valuation of the assets acquired and liabilities assumed is subject to income taxes orrevision. If additional information becomes available, the Company may further revise the purchase price allocation as soon as practical, but no later than one year from the acquisition date. Goodwill generated by the acquisitions is primarily attributable to the strong market position of the entities acquired.
Purchase price consideration for all acquisitions was paid primarily in cash. All acquisitions were for 100 percent of the acquired business and are reported in the Consolidated Statements of Cash Flows, net of acquired cash and cash equivalents. Acquisition-related costs, including advisory, legal, accounting, valuation and other costs, are typically expensed in the periods in which the costs are incurred and are recorded in acquisition and restructuring costs. The results of operations of acquired businesses are included in the consolidated financial statements from the acquisition date.
In 2022, the Company acquired substantially all the assets of John's Ind., Inc. ("John's"), Southern Kentucky Classics ("SKC"), and Vesta Motorsports USA, Inc., doing business as RaceQuip ("RaceQuip"). These acquisitions were immaterial business combinations. Cash paid for the three acquisitions, net of cash acquired, was $14,863, and was funded with borrowings from the Company's credit facility and cash on hand. The acquisitions resulted in both amortizable and nonamortizable intangibles and goodwill totaling $10,553. The goodwill and intangibles generated as a result of these acquisitions are deductible for income tax filing requirements inpurposes. The final allocation of the Cayman Islands orpurchase price allocation to specific assets acquired and liabilities assumed was adjusted to reflect the United States. As such, the Company’s tax provision was zero for the period presented.final fair value estimate of acquired assets and liabilities, as noted below.
Net Loss per Ordinary ShareThe allocation of the purchase price to the assets acquired and liabilities assumed was based on estimates of the fair value of the net assets as follows:
Net loss per ordinary share is computed by dividing net loss by the weighted average number of ordinary shares outstanding during the period, excluding ordinary shares subject to forfeiture. Weighted average shares were reduced for the effect of an aggregate of 937,500 ordinary shares, that were subject to forfeiture if the over-allotment option was not exercised by the underwriter (see Note 5). At September 30, 2020, the Company did not have any dilutive securities and other contracts that could, potentially, be exercised or converted into ordinary shares and then share in the earnings of the Company. As a result, diluted loss per common share is the same as basic loss per share for the period presented.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist of a cash account in a financial institution which, at times may exceed the Federal Depository Insurance Coverage of $250,000. The Company has not experienced losses on this account and management believes the Company is not exposed to significant risks on such account.
Fair Value of Financial Instruments
Measurement | ||||||||||||
2022 | Period | 2022 | ||||||||||
(as initially reported) | Adjustments | (as adjusted) | ||||||||||
Accounts receivable | $ | 959 | $ | (397 | ) | $ | 562 | |||||
Inventory | 3,481 | 146 | 3,627 | |||||||||
Property, plant and equipment | 275 | — | 275 | |||||||||
Other assets | 1,132 | (1,108 | ) | 24 | ||||||||
Tradenames | 1,689 | — | 1,689 | |||||||||
Customer relationships | 1,512 | — | 1,512 | |||||||||
Goodwill | 5,858 | 1,494 | 7,352 | |||||||||
Accounts payable | (25 | ) | (133 | ) | (158 | ) | ||||||
Accrued liabilities | (18 | ) | (2 | ) | (20 | ) | ||||||
$ | 14,863 | $ | — | $ | 14,863 |
The fair value of the acquired customer relationship intangible asset was estimated using the excess earnings approach. The customer relationship intangible asset is being amortized based on the attrition rate of customers which was determined to be 20 years. The fair value of the acquired tradenames intangible asset was estimated using the relief from royalty method, a form of the income approach. The tradenames were determined to have an indefinite life.
3. | INVENTORY |
Inventories of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Raw materials | $ | 71,392 | $ | 78,586 | ||||
Work-in-process | 24,915 | 23,906 | ||||||
Finished goods | 121,197 | 131,081 | ||||||
$ | 217,504 | $ | 233,573 |
4. | PROPERTY, PLANT AND EQUIPMENT, NET |
Property, plant and equipment of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Land | $ | 3,426 | $ | 3,426 | ||||
Buildings and improvements | 11,669 | 11,051 | ||||||
Machinery and equipment | 70,947 | 66,140 | ||||||
Construction in process | 5,939 | 9,563 | ||||||
Total property, plant and equipment | 91,981 | 90,180 | ||||||
Less: accumulated depreciation | 42,290 | 37,999 | ||||||
Property, plant and equipment, net | $ | 49,691 | $ | 52,181 |
The Company’s long-lived assets by geographic locations are as follows:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
United States | $ | 47,856 | $ | 50,434 | ||||
International | 1,835 | 1,747 | ||||||
Total property, plant and equipment, net | $ | 49,691 | $ | 52,181 |
5. | GOODWILL AND OTHER INTANGIBLE ASSETS |
The following presents changes to goodwill for the period indicated:
For the twenty-six weeks ended | ||||
July 2, 2023 | ||||
Balance on December 31, 2022 | 418,121 | |||
Measurement period adjustments | 935 | |||
Balance on July 2, 2023 | $ | 419,056 |
Goodwill represents the premium paid over the fair value of the net tangible and identifiable intangible assets acquired in the Company's business combinations. The measurement period for the valuation of assets acquired and liabilities which qualifyassumed ends as financial instruments under ASC Topic 820, “Fair Value Measurement,” approximatessoon as information on the carrying amounts representedfacts and circumstances that existed as of the acquisition date becomes available, not to exceed 12 months. Adjustments in purchase price allocations may require a change in the accompanying condensed balance sheet, primarily dueamounts allocated to their short-term nature.goodwill during the periods in which the adjustments are determined.
Recent Accounting StandardsNo impairment charges were incurred during the 13-week and 26-week periods ended July 2, 2023 and July 3, 2022. Potential changes in our costs and operating structure, the implementation of synergies, and overall performance in the automotive aftermarket industry, could negatively impact our near-term cash-flow projections and could trigger a potential impairment of the Company's goodwill and / or indefinite-lived intangible assets. In addition, failure to execute the Company's strategic plans as well as increases in weighted average costs of capital could negatively impact the fair value of the reporting unit and increase the risk of future impairment charges.
Management does not believe that any recentlyIntangible assets consisted of the following:
July 2, 2023 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (49,949 | ) | $ | 220,001 | |||||
Tradenames | 13,775 | (5,206 | ) | 8,569 | ||||||||
Technology | 26,676 | (12,742 | ) | 13,934 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (67,897 | ) | $ | 242,504 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 175,109 | — | $ | 175,109 |
December 31, 2022 | ||||||||||||
Gross Carrying Amount | Accumulated Amortization | Net Carrying Value | ||||||||||
Finite-lived intangible assets: | ||||||||||||
Customer relationships | $ | 269,950 | $ | (44,178 | ) | $ | 225,772 | |||||
Tradenames | 13,775 | (4,843 | ) | 8,932 | ||||||||
Technology | 26,676 | (11,523 | ) | 15,153 | ||||||||
Total finite-lived intangible assets | $ | 310,401 | $ | (60,544 | ) | $ | 249,857 | |||||
Indefinite-lived intangible assets: | ||||||||||||
Tradenames | $ | 174,998 | — | $ | 174,998 |
The following outlines the estimated future amortization expense related to intangible assets held as of July 2, 2023:
2023 (excluding the twenty-six weeks ended July 2, 2023) | $ | 7,204 | ||
2024 | 13,744 | |||
2025 | 13,714 | |||
2026 | 13,608 | |||
2027 | 13,493 | |||
Thereafter | 180,741 | |||
Total | $ | 242,504 |
6. | ACCRUED LIABILITIES |
Accrued liabilities of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Accrued freight | $ | 5,865 | $ | 6,861 | ||||
Accrued employee compensation and benefits | 8,682 | 6,259 | ||||||
Accrued returns and allowances | 6,094 | 5,214 | ||||||
Accrued taxes | 8,793 | 5,222 | ||||||
Current portion of operating lease liabilities | 5,112 | 5,112 | ||||||
Accrued other | 12,059 | 14,649 | ||||||
Total accrued liabilities | $ | 46,605 | $ | 43,317 |
7. | DEBT |
Debt of the Company consisted of the following:
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
First lien term loan due November 17, 2028 | $ | 645,636 | $ | 649,350 | ||||
Revolver | — | 10,000 | ||||||
Other | 2,453 | 2,770 | ||||||
Less unamortized debt issuance costs | (12,083 | ) | (11,557 | ) | ||||
636,006 | 650,563 | |||||||
Less current portion of long-term debt | (6,571 | ) | (7,000 | ) | ||||
$ | 629,435 | $ | 643,563 |
On November 18, 2021, the Company entered into a credit facility with a syndicate of lenders and Wells Fargo Bank, N.A., as administrative agent for the lenders, letter of credit issuer and swing line lender (the "Credit Agreement"). The financing consisted of a seven-year $600,000 first lien term loan, a five-year $125,000 revolving credit facility, and a $100,000 delayed draw term loan. The proceeds of delayed draw loans made after closing were available to the Company to finance acquisitions. Upon the expiration of the delayed draw term loan in May 2022, the Company had drawn $57,000, which is included in the amount outstanding under the first lien term loan due November 17, 2028.
The revolving credit facility includes a letter of credit facility in the amount of $10,000, pursuant to which letters of credit may be issued but not yet effective, accounting standards, if currently adopted, would have a material effectas long as revolving loans may be advanced and subject to availability under the revolving credit facility. The Company had $1,728 in outstanding letters of credit on July 2, 2023.
Proceeds from the credit facility were used to repay in full the Company’s obligations under its previously existing first lien and second lien notes and to pay $13,413 in deferred financing fees related to the refinancing.
The first lien term loan is to be repaid in quarterly payments of $1,643 through September 30, 2028 with the balance due upon maturity on November 17, 2028. The Company is required to make annual payments on the accompanying condensed financial statements.term loan in an amount equal to 50% of annual excess cash flow greater than $5,000, as defined in the Credit Agreement. This percentage requirement may decrease or be eliminated if certain leverage ratios are achieved. Based on the Company's results for 2022,no excess cash flow payment was required in 2023. Any such payments offset future mandatory quarterly payments.
As of July 2, 2023, amounts outstanding under the credit facility accrue interest at a rate equal to either the Secured Overnight Financing Rate ("SOFR") or base rate, at the Company's election, plus a specified margin. In the case of revolving credit loans and letter of credit fees, the specified margin is based on the Company's Total Leverage Ratio, as defined in the Credit Agreement. Commitment fees payable under the revolving credit facility are based on the Company's Total Leverage Ratio. On July 2, 2023, the weighted average interest rate on the Company's borrowings under the credit facility was 9.2%.
RisksThe Company has entered into an interest rate collar in the notional amount of $500,000 to hedge the Company's exposure to fluctuations in interest rates on its variable-rate debt. Refer to Note 9,"Derivative Instruments," for additional information.
Obligations under the Credit Agreement are secured by substantially all of the Company’s assets. The Credit Agreement includes representations and Uncertaintieswarranties and affirmative and negative covenants customary for financings of this type, including, but not limited to, limitations on restricted payments, additional borrowings, additional investments, and asset sales.
In March 2020, February 2023, the World Health Organization declaredCompany entered into an amendment to the outbreak of a novel coronavirus (COVID-19) as a pandemicCredit Agreement which, continues to spread throughoutamong other things, increases the United States andconsolidated net leverage ratio financial covenant level applicable under the World. As of the date the financial statements were issued, there was considerable uncertainty around the expected duration of this pandemic. The Company has concluded that while it is reasonably possible that COVID-19 could have a negative effect on identifying a target company for a Business Combination, the specific impact is not readily determinableCredit Agreement as of the datequarter ending April 2, 2023 through the quarter ending March 31, 2024 (the “Covenant Relief Period”), to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter. As an ongoing condition to the Covenant Relief Period, the Company also agreed to (i) a minimum liquidity test, (ii) an interest coverage test, (iii) an anti-cash hoarding test at any time revolving loans are outstanding, and (iv) additional reporting obligations. Under the amended Credit Agreement, the revolving credit facility contains a minimum liquidity financial covenant of $45,000, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. In April 2023, the Company entered into a second amendment to the Credit Agreement in which the interest rate on any outstanding borrowings under the Credit Agreement was changed from LIBOR to SOFR. In May 2023, the Company entered into a third amendment to the Credit Agreement in which certain defined terms were clarified. The Company incurred $1,427 of deferred financing fees related to these amendments. On July 2, 2023, the Company was in compliance with all financial statements. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.covenants.
NOTE 3. INITIAL PUBLIC OFFERINGSome of the lenders that are parties to the Credit Agreement, and their respective affiliates, have various relationships with the Company in the ordinary course of business involving the provision of financial services, including cash management, commercial banking, investment banking or other services.
PursuantFuture maturities of long-term debt and amortization of debt issuance costs as of July 2, 2023 are as follows:
Debt | Debt Issuance Costs | |||||||
2023 (excluding the twenty-six weeks ended July 2, 2023) | $ | 3,793 | $ | 907 | ||||
2024 | 7,447 | 1,942 | ||||||
2025 | 7,642 | 2,096 | ||||||
2026 | 6,571 | 2,265 | ||||||
2027 | 6,571 | 2,450 | ||||||
Thereafter | 616,065 | 2,423 | ||||||
$ | 648,089 | $ | 12,083 |
8. | COMMON STOCK WARRANTS AND EARN-OUT LIABILITY |
Upon the Closing, there were 14,666,644 Warrants, consisting of 9,999,977 public warrants ("Public Warrants") and 4,666,667 private warrants ("Private Warrants"), outstanding to purchase shares of Common Stock that were issued by Empower prior to the Initial Public Offering,Business Combination. Each warrant entitles the Company sold 25,000,000 Units, at a purchase price of $10.00 per Unit. Each Unit consists of one Class A ordinary share and one-third of one redeemable warrant (“Public Warrant”). Each whole Public Warrant entitles theregistered holder to purchase one Class A ordinary share at an exercise price of $11.50 per share, subject to adjustment (see Note 7).
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
NOTE 4. PRIVATE PLACEMENT
Simultaneously with the closing of the Initial Public Offering, the Sponsor purchased an aggregate of 4,666,667 Private Placement Warrants at a price of $1.50 per Private Placement Warrant, for an aggregate purchase price of $7,000,000. Each Private Placement Warrant is exercisable for one Class A ordinary shareCommon Stock at a price of $11.50 per share, subject to adjustment (see Note 7). The proceeds from the sale of the Private Placement Warrants were added to the net proceeds from the Initial Public Offering held in the Trust Account. If the Company does not complete a Business Combination within the Combination Period, the proceeds from the sale of the Private Placement Warrants held in the Trust Account will be used to fund the redemption of the Public Shares (subject to the requirements of applicable law) and the Private Placement Warrants will expire worthless.
NOTE 5. RELATED PARTY TRANSACTIONS
Founder Shares
During the period ended August 21, 2020, the Sponsor paid $25,000 to cover certain offering and formation costs of the Company in consideration for 7,187,500 shares of Class B ordinary shares (the “Founder Shares”). The Founder Shares include an aggregate of up to 937,500 shares subject to forfeiture by the Sponsor to the extent that the underwriters’ over-allotment is not exercised in full or in part, so that the number of Founder Shares will collectively represent 20% of the Company’s issued and outstanding shares upon the completion of the Initial Public Offering.
The Sponsor has agreed, subject to limited exceptions, not to transfer, assign or sell any of its Founder Shares until the earlier to occur of: (A) one year after the completion of a Business Combination; and (B) subsequent to a Business Combination, (x) if the closing price of the Class A ordinary shares equals or exceeds $12.00 per share (as adjusted for share sub-divisions, share capitalizations, reorganizations, recapitalizations and the like) for any 20 trading days within any 30-trading day period commencing at least 150 days after a Business Combination, or (y) the date on which the Company completes a liquidation, merger, share exchange or other similar transaction that results in all of the Company’s shareholders having the right to exchange their Class A ordinary shares for cash, securities or other property.
Promissory Note — Related Party
On August 21, 2020, the Company issued an unsecured promissory note to the Sponsor (the “Promissory Note”), pursuant to which the Company may borrow up to an aggregate principal amount of $300,000. The Promissory Note is non-interest bearing and payable on the earlier of (i) December 31, 2020 or (i) the consummation of the Initial Public Offering. As of September 30, 2020, there was $145,893 outstanding under the Promissory Note. The outstanding balance under the Note of $150,295 was repaid at the closing of the Initial Public Offering on October 9, 2020.
Related Party Loans
In order to finance transaction costs in connection with a Business Combination, the Sponsor or an affiliate of the Sponsor or certain of the Company’s directors and officers may, but are not obligated to, loan the Company funds as may be required (“Working Capital Loans”). If the Company completes a Business Combination, the Company would repay the Working Capital Loans out of the proceeds of the Trust Account released to the Company. Otherwise, the Working Capital Loans would be repaid only out of funds held outside the Trust Account. In the event that a Business Combination does not close, the Company may use a portion of proceeds held outside the Trust Account to repay the Working Capital Loans, but no proceeds held in the Trust Account would be used to repay the Working Capital Loans. Except for the foregoing, the terms of such Working Capital Loans, if any, have not been determined and no written agreements exist with respect to such loans. The Working Capital Loans would either be repaid upon consummation of a Business Combination, without interest, or, at the lender’s discretion, up to $2,000,000 of such Working Capital Loans may be convertible into warrants of the post-Business Combination entity at a price of $1.50 per warrant. The warrants would be identical to the Private Placement Warrants.
NOTE 6. COMMITMENTS
Registration and Shareholders Rights
Pursuant to a registration and shareholder rights agreement entered into on October 9, 2020, the holders of the Founder Shares, Private Placement Warrants and warrants that may be issued upon conversion of the Working Capital Loans (and any Class A ordinary shares issuable upon the exercise of the Private Placement Warrants and warrants that may be issued upon conversion of Working Capital Loans and upon conversion of the Founder Shares) will be entitled to registration rights. The holders of these securities are entitled to make up to three demands, excluding short form demands,adjustments, provided that the Company register such securities. In addition, the holders have certain “piggy-back” registration rights with respect to registration statements filed subsequent to completion of a Business Combination. However, the registration and shareholder rights agreement provides that the Company will not permit any registration statement filed under the Securities Act to becomehas an effective until termination of the applicable lockup period. The registration and shareholders rights agreement does not contain liquidating damages or other cash settlement provisions resulting from delays in registering the Company’s securities. The Company will bear the expenses incurred in connection with the filing of any such registration statements.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
Pursuant to the forward purchase agreement, the Company agreed that it will use its commercially reasonable efforts to (i) within 30 days after the closing of the a Business Combination, file a registration statement with the SEC for a secondary offering of (A) the forward purchase investors’ forward purchase shares, (B) the Class A ordinary shares issuable upon exercise of the forward purchase investors’ forward purchase warrants and (C) any other Class A ordinary shares acquired by the forward purchase investors, including any acquisitions after the Company completes a Business Combination, (ii) cause such registration statement to be declared effective promptly thereafter, but in no event later than 90 days after the closing of a Business Combination and (iii) maintain the effectiveness of such registration statement and to ensure the registration statement does not contain a material omission or misstatement, including by way of amendment or other update, as required, until the earlier of (A) the date on which a forward purchase investor ceases to hold the securities covered thereby and (B) the date all of the securities covered thereby can be sold publicly without restriction or limitation under Rule 144 under the Securities Act, and without the requirement to be in compliance with Rule 144(c)(1) under the Securities Act, subject to certain conditions and limitations set forth in the forward purchase agreement. The Company will bear the cost of registering these securities.
Underwriting Agreement
The Company granted the underwriters a 45-day option to purchase up to 3,750,000 additional Units to cover over-allotments at the Initial Public Offering price, less the underwriting discounts and commissions.
The underwriters are entitled to a deferred fee of $0.35 per Unit, or $8,750,000 in the aggregate (or $10,062,500 if the underwriters’ over-allotment is exercised in full). The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that the Company completes a Business Combination, subject to the terms of the underwriting agreement.
Forward Purchase Agreement
The Company entered into a forward purchase agreement to which Empower Funding LLC (“Empower Funding”), a newly formed Delaware limited liability company which has received commitments from one or more funds affiliated with MidOcean Partners (“MidOcean”), and is an affiliate of the Sponsor, will purchase an aggregate of up to 5,000,000 forward purchase units, consisting of one Class A ordinary share and one-third of one warrant to purchase one Class A ordinary share for $10.00 per unit, or up to $50,000,000 in the aggregate, in a private placement to close substantially concurrently with the closing of a Business Combination, subject to approval at such time by the MidOcean investment committee. The allocation of the forward purchase securities among the ultimate MidOcean funds that will be funding the forward purchase will be determined by MidOcean, in its sole discretion, at the time of a Business Combination. If the sale of the forward purchase units fails to close, for any reason, the Company may lack sufficient funds to consummate a Business Combination. The forward purchase shares and forward purchase warrants will be identical to the Class A ordinary shares included in the units sold in the Initial Public Offering, except that they will be subject to certain registration rights.
NOTE 7. SHAREHOLDER’S EQUITY
Preference Shares — The Company is authorized to issue 5,000,000 preference shares with a par value of $0.0001 per share, with such designations, voting and other rights and preferences as may be determined from time to time by the Company’s board of directors. At September 30, 2020, there were no preference shares issued or outstanding.
Class A Ordinary Shares — The Company is authorized to issue 500,000,000 Class A ordinary shares, with a par value of $0.0001 per share. Holders of Class A ordinary shares are entitled to one vote for each share. At September 30, 2020, there were no Class A ordinary shares issued or outstanding.
Class B Ordinary Shares — The Company is authorized to issue 50,000,000 Class B ordinary shares, with a par value of $0.0001 per share. Holders of the Class B ordinary shares are entitled to one vote for each share. At September 30, 2020, there were 7,187,500 Class B ordinary shares issued and outstanding, of which an aggregate of up to 937,500 shares are subject to forfeiture to the extent that the underwriters’ over-allotment option is not exercised in full or in part so that the number of Founder Shares will equal 20% of the Company’s issued and outstanding ordinary shares after the Initial Public Offering.
Holders of Class A ordinary shares and holders of Class B ordinary shares will vote together as a single class on all other matters submitted to a vote of the Company’s shareholders except as otherwise required by law.
The Class B ordinary shares will automatically convert into Class A ordinary shares at the time of a Business Combination or earlier at the option of the holders thereof at a ratio such that the number of Class A ordinary shares issuable upon conversion of all Founder Shares will equal, in the aggregate, on an as-converted basis, 20% of the sum of (i) the total number of ordinary shares issued and outstanding upon completion of Initial Public Offering, plus (ii) the total number of Class A ordinary shares issued or deemed issued or issuable upon conversion or exercise of any equity-linked securities or rights issued or deemed issued, by the Company in connection with or in relation to the consummation of a Business Combination, excluding any forward purchase securities and Class A ordinary shares or equity-linked securities exercisable for or convertible into Class A ordinary shares issued, deemed issued, or to be issued, to any seller in the Business Combination and any Private Placement Warrants issued to the Sponsor, its affiliates or any member of the Company’s management team upon conversion of Working Capital Loans. In no event will the Class B ordinary shares convert into Class A ordinary shares at a rate of less than one-to-one.
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
Warrants — Public Warrants may only be exercised for a whole number of shares. No fractional shares will be issued upon exercise of the Public Warrants. The Public Warrants will become exercisable on the later of (a) 30 days after the completion of a Business Combination and (b) one year from the closing of the Initial Public Offering. The Public Warrants will expire five years from the completion of a Business Combination or earlier upon redemption or liquidation.
The Company will not be obligated to deliver any Class A ordinary shares pursuant to the exercise of a Public Warrant and will have no obligation to settle such Public Warrant exercise unless a registration statement under the Securities Act covering the issuanceshares of the Class A ordinary sharescommon stock issuable upon exercise of the warrants is then effectiveWarrants and a current prospectus relating theretoto them is available subject to the Company satisfying its obligations with respect to registration,and such shares are registered, qualified or a valid exemptionexempt from registration is available. No warrant will be exercisable for cash or on a cashless basis, and the Company will not be obligated to issue any shares to holders seeking to exercise their warrants, unless the issuance of the shares upon such exercise is registered or qualified under the securities laws of the state of residence of the exercising holder, or an exemptionholder. The Warrants may be exercised only for a whole number of shares of Common Stock. The Warrants expire on July 16, 2026, the date that is available.
The Company has agreed that as soon as practicable, but in no event later than 20 business days,five years after the closing of a Business Combination, it will use its commercially reasonable efforts to file with the SEC a registration statement, under the Securities Act, of the Class A ordinary shares issuableClosing date, or earlier upon exercise of the warrants, and the Company will use its commercially reasonable efforts to cause the same to become effective within 60 business days after the closing of a Business Combination, and to maintain the effectiveness of such registration statement and a current prospectus relating to those Class A ordinary shares until the warrants expireredemption or are redeemed, as specified in the warrant agreement; provided that if our Class A ordinary shares are at the time of any exercise of a warrant not listed on a national securities exchange such that they satisfy the definition of a “covered security” under Section 18(b)(1) of the Securities Act, the Company may, at its option, require holders of Public Warrants who exercise their warrants to do so on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act and, in the event the Company so elects, the Company will not be required to file or maintain in effect a registration statement, but the Company will use its commercially reasonably efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available. If a registration statement covering the Class A ordinary shares issuable upon exercise of the warrants is not effective by the 60th day after the closing of a Business Combination, warrant holders may, until such time as there is an effective registration statement and during any period when the Company has failed to maintain an effective registration statement, exercise warrants on a “cashless basis” in accordance with Section 3(a)(9) of the Securities Act or another exemption, but the Company will use its commercially reasonably efforts to register or qualify the shares under applicable blue sky laws to the extent an exemption is not available.
Redemption of Warrants When the Price per Class A Ordinary Share Equals or Exceeds $18.00 — Once the warrants become exercisable, the Company may redeem the outstanding Public Warrants:
If and when the warrants become redeemable by the Company, the Company may exercise its redemption right even if the Company are unable to register or qualify the underlying securities for sale under all applicable state securities laws.
Redemption of Warrants When the Price per Class A Ordinary Share Equals or Exceeds $10.00 — Once the warrants become exercisable, the Company may redeem the outstanding warrants:
EMPOWER LTD.NOTES TO CONDENSED FINANCIAL STATEMENTSSEPTEMBER 30, 2020(Unaudited)
The exercise price and number of ordinary shares issuable upon exercise of the Public Warrants may be adjusted in certain circumstances including in the event of a share dividend, extraordinary dividend or recapitalization, reorganization, merger or consolidation. However, except as described below, the Public Warrants will not be adjusted for issuances of ordinary shares at a price below its exercise price. Additionally, in no event will the Company be required to net cash settle the Public Warrants. If the Company is unable to complete a Business Combination within the Combination Period and the Company liquidates the funds held in the Trust Account, holders of Public Warrants will not receive any of such funds with respect to their Public Warrants, nor will they receive any distribution from the Company’s assets held outside of the Trust Account with respect to such Public Warrants. Accordingly, the Public Warrants may expire worthless.
In addition, if (x) the Company issues additional Class A ordinary shares or equity-linked securities for capital raising purposes in connection with the closing of a Business Combination at an issue price or effective issue price of less than $9.20 per Class A ordinary share (with such issue price or effective issue price to be determined in good faith by the Company’s board of directors and, in the case of any such issuance to the Sponsor or its affiliates, without taking into account any Founder Shares held by the Sponsor or such affiliates, as applicable, prior to such issuance) (the “Newly Issued Price”), (y) the aggregate gross proceeds from such issuances represent more than 60% of the total equity proceeds, and interest thereon, available for the funding of a Business Combination on the date of the consummation of a Business Combination (net of redemptions), and (z) the volume weighted average trading price of its Class A ordinary shares during the 20 trading day period starting on the trading day prior to the day on which the Company consummates its Business Combination (such price, the “Market Value”) is below $9.20 per share, the exercise price of the warrants will be adjusted (to the nearest cent) to be equal to 115% of the higher of the Market Value and the Newly Issued Price, the $18.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to 180% of the higher of the Market Value and the Newly Issued Price, and the $10.00 per share redemption trigger price will be adjusted (to the nearest cent) to be equal to the higher of the Market Value and the Newly Issued Price.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants and the Class A ordinary shares issuable upon the exercise of the Private Placement Warrants will not be transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.liquidation. Additionally, the Private Placement Warrants will be non-redeemable and are exercisable on a cashless basis and be non-redeemable, except as described above, so long as they are held by the initial purchasersEmpower Sponsor Holdings, LLC (the "Sponsor") or theirany of its permitted transferees. If the Private Placement Warrants are held by someone other than the initial purchasersSponsor or theirits permitted transferees, the Private Placement Warrants will be redeemable by the Company and exercisable by such holders on the same basis as the Public Warrants.
NOTE 8. SUBSEQUENT EVENTSThe Company may redeem the Public Warrants at a price of $0.01 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $18.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given, provided there is an effective registration statement and current prospectus in effect with respect to the ordinary shares underlying such Warrants throughout the 30-day redemption period. If the foregoing conditions are satisfied and the Company issues a notice of redemption of the Warrants, the Warrant holder is entitled to exercise his, her or its Warrant prior to the scheduled redemption date. Any such exercise requires the Warrant holder to pay the exercise price for each Warrant being exercised. Further, the Company may redeem the Public Warrants at a price of $0.10 per warrant upon 30 days' notice if the closing price of Common Stock equals or exceeds $10.00 per share, subject to adjustments, on the trading day prior to the date on which notice of redemption is given. Beginning on the date the notice of redemption is given until the Warrants are redeemed or exercised, holders may elect to exercise their Warrants on a cashless basis and receive that number of shares of Common Stock as determined by reference to a table in the warrant agreement.
During any period when the Company has failed to maintain an effective registration statement, warrant holders may exercise Warrants on a cashless basis in accordance with Section 3(a)(9) of the Securities Act or another exemption, and the Company will use its commercially reasonable best efforts to register or qualify the shares under applicable blue-sky laws to the extent an exemption is not available.
The Company’s Warrants are accounted for as a liability in accordance with ASC 815-40 and are presented as a warrant liability on the balance sheet. The warrant liability was measured at fair value at inception and on a recurring basis, with changes in fair value recognized as non-operating expense. As of July 2, 2023 and December 31, 2022, a warrant liability with a fair value of $7,725 and $4,272, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. An increase of $2,017 and a decrease of $23,168 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended July 2, 2023 and July 3, 2022, respectively. An increase of $3,452 and a decrease of $20,941 in the fair value of the warrant liability was reflected as change in fair value of warrant liability in the condensed consolidated statements of comprehensive income for the 26-week periods ended July 2, 2023 and July 3, 2022, respectively. In April 2022, the Company issued 33,333 shares of Common Stock in connection with the exercise of Public Warrants assumed in the Business Combination.
Additionally, the Sponsor received 2,187,500 shares of Common Stock upon the Closing, which vest in two equal tranches upon achievement of certain market share price milestones during the earn-out period, as outlined in the Merger Agreement (“the “Earn-Out Shares”). The first tranche of Earn-Out Shares vested during the first quarter of 2022. Upon vesting, the first tranche of 1,093,750 Earn-Out Shares were issued and a liability of $14,689, representing the fair value of the shares on the date of vesting, was reclassified from liabilities to equity. The remaining tranche of Earn-Out Shares will be forfeited if the applicable conditions are not satisfied before July 16, 2028 (seven years after the Closing Date). The unvested Earn-Out Shares are presented as an earn-out liability on the balance sheet and are remeasured at fair value with changes in fair value recognized as non-operating expense. As of July 2, 2023 and December 31, 2022, an earn-out liability with a fair value of $2,565 and $1,176, respectively, was reflected as a long-term liability in the condensed consolidated balance sheet. An increase of $961 and a decrease of $4,234 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 13-week periods ended July 2, 2023 and July 3, 2022, respectively. An increase of $1,389 and a decrease of $1,853 in the fair value of the earn-out liability was reflected as change in fair value of earn-out liability in the condensed consolidated statements of comprehensive income for the 26-week periods ended July 2, 2023 and July 3, 2022, respectively.
9. | DERIVATIVE INSTRUMENTS |
The Company from time to time enters into derivative financial instruments, such as interest rate collar agreements (“Collars”), to manage its exposure to fluctuations in interest rates on the Company’s variable rate debt. On January 4, 2023, the Company entered into a Collar with Wells Fargo Bank, N.A. ("Wells Fargo") with a notional amount of $500,000 that expires on February 18, 2026. The Collar has a floor of 2.811% and a cap of 5% (based on three-month SOFR). The structure of this Collar is such that the Company receives an incremental amount if the Collar index exceeds the cap rate. Conversely, the Company pays an incremental amount to Wells Fargo if the Collar index falls below the floor rate. No payments are required if the Collar index falls between the cap and floor rates.
As of July 2, 2023, the Company recognized a derivative asset of $2,068 for the Collar in other noncurrent assets on the condensed consolidated balance sheet. For the 13-week and 26-week periods ended July 2, 2023, the Company recorded a net change in the fair value of the Collar as a decrease to interest expense of $5,088 and $2,068, respectively. No cash payments were made or received during the 13-week and 26-week periods ended July 2, 2023, as the applicable rate was between the cap and floor rates as of the settlement dates.
The fair value of the Collar is determined using observable market-based inputs and the impact of credit risk on the derivative’s fair value (the creditworthiness of the Company’s counterparty for assets and the creditworthiness of the Company for liabilities) (a Level 2 measurement, as described in Note 10,"Fair Value Measurements").
10. | FAIR VALUE MEASUREMENTS |
The Company’s financial liabilities subject to fair value measurement on a recurring basis and the level of inputs used for such measurements were as follows:
Fair Value Measured on July 2, 2023 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Assets: | ||||||||||||||||
Interest rate collar | $ | — | $ | 2,068 | $ | — | $ | 2,068 | ||||||||
Liabilities: | ||||||||||||||||
Warrant liability (Public) | $ | 4,994 | $ | — | $ | — | $ | 4,994 | ||||||||
Warrant liability (Private) | — | — | 2,731 | 2,731 | ||||||||||||
Earn-out liability | — | — | 2,565 | 2,565 | ||||||||||||
Total fair value liabilities | $ | 4,994 | $ | — | $ | 5,296 | $ | 10,290 |
Fair Value Measured on December 31, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Liabilities: | ||||||||||||||||
Warrant liability (Public) | $ | 2,691 | $ | — | $ | — | $ | 2,691 | ||||||||
Warrant liability (Private) | — | — | 1,581 | 1,581 | ||||||||||||
Earn-out liability | — | — | 1,176 | 1,176 | ||||||||||||
Total fair value liabilities | $ | 2,691 | $ | — | $ | 2,757 | $ | 5,448 |
As of July 2, 2023, the Company's derivative liabilities for its Private and Public Warrants, earn-out liability, and derivative asset for its Collar are measured at fair value on a recurring basis (see Note 8, “Common Stock Warrants and Earn-Out Liability,” and Note 9, "Derivative Instruments," for more details). The fair values of the private warrants and earn-out liability are determined based on significant inputs not observable in the market (Level 3). The valuation of the Level 3 liabilities uses assumptions and estimates the Company believes would be made by a market participant in making the same valuation. The Company assesses these assumptions and estimates on an on-going basis as additional data impacting the assumptions and estimates are obtained. The Company uses a Monte Carlo simulation model to estimate the fair value of its Private Warrants and earn-out liability. The fair value of the Collar, which is included in other noncurrent assets on the condensed consolidated balance sheet, is determined based on models that reflect the contractual terms of the derivative, yield curves, and the credit quality of the counterparties. Inputs are generally observable and do not contain a high level of subjectivity (Level 2). The fair value of the Public Warrants is determined using publicly traded prices (Level 1). Changes in the fair value of the derivative liabilities related to Warrants and the earn-out liability are recognized as non-operating expense in the condensed consolidated statements of comprehensive income. Changes in the fair value of the Collar is recognized as an adjustment to interest expense in the condensed consolidated statements of comprehensive income.
The fair value of Private Warrants was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 2, 2023 | December 31, 2022 | |||||||
Valuation date price | $ | 4.09 | $ | 2.12 | ||||
Strike price | $ | 11.50 | $ | 11.50 | ||||
Remaining life (in years) | 3.04 | 3.54 | ||||||
Expected dividend | $ | — | $ | — | ||||
Risk-free interest rate | 4.36 | % | 4.06 | % | ||||
Price threshold | $ | 18.00 | $ | 18.00 |
The fair value of the earn-out liability was estimated as of the measurement date using the Monte Carlo simulation model with the following assumptions:
July 2, 2023 | December 31, 2022 | |||||||
Valuation date price | $ | 4.09 | $ | 2.12 | ||||
Expected term (in years) | 5.04 | 5.54 | ||||||
Expected volatility | 61.26 | % | 70.33 | % | ||||
Risk-free interest rate | 4.01 | % | 3.88 | % | ||||
Price hurdle | $ | 15.00 | $ | 15.00 |
As of July 2, 2023 and December 31, 2022, the Company has accounts receivable, accounts payable and accrued expenses for which the carrying value approximates fair value due to the short-term nature of these instruments. The carrying value of the Company’s long-term debt approximates fair value as the rates used approximate the market rates currently available to the Company. Fair value measurements used in the impairment reviews of goodwill and intangible assets are Level 3 measurements.
The reconciliation of changes in Level 3 liabilities during the 26-week periods ended July 2, 2023 and July 3, 2022 is as follows:
Private Warrants | Earn-Out Liability | Total | ||||||||||
Balance at December 31, 2021 | $ | 21,793 | $ | 26,596 | $ | 48,389 | ||||||
Liabilities reclassed to equity | — | (14,689 | ) | (14,689 | ) | |||||||
Gains included in earnings | (7,653 | ) | (1,853 | ) | (9,506 | ) | ||||||
Balance at July 3, 2022 | $ | 14,140 | $ | 10,054 | $ | 24,194 | ||||||
Balance at December 31, 2022 | $ | 1,581 | $ | 1,176 | $ | 2,757 | ||||||
Losses included in earnings | 1,150 | 1,389 | 2,539 | |||||||||
Balance at July 2, 2023 | $ | 2,731 | $ | 2,565 | $ | 5,296 |
11. | REVENUE |
The principal activity from which the Company generates its revenue is the manufacturing and distribution of after-market automotive parts for its customers, comprised of resellers and end users. The Company recognizes revenue at a point in time, rather than over time, as the performance obligation is satisfied when customer obtains control of the product upon title transfer and not as the product is manufactured or developed. The amount of revenue recognized is based on the purchase order price and adjusted for revenue allocated to variable consideration (i.e., estimated rebates, co-op advertising, etc.).
The Company collects sales tax and other taxes concurrent with revenue-producing activities which are excluded from revenue. Shipping and handling costs incurred after control of the product is transferred to our customers are treated as fulfillment costs and not a separate performance obligation.
The Company allows customers to return products when certain Company-established criteria are met. These sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized, net of returns to stock. Returned products, which are recorded as inventories, are valued at the lower of cost or net realizable value. The physical condition and marketability of the returned products are the major factors considered in estimating realizable value. The Company also estimates expected sales returns and records the necessary adjustment as a charge against gross sales.
The Company’s payment terms with customers are customary and vary by customer and geography but typically range from 30 to 365 days. The Company elected the practical expedient to disregard the possible existence of a significant financing component related to payment on contracts, as the Company expects that customers will pay for the products within one year. The Company has evaluated subsequent eventsthe terms of our arrangements and transactionsdetermined that occurred afterthey do not contain significant financing components. Additionally, as all contracts with customers have an expected duration of one year or less, the balance sheet date upCompany has elected the practical expedient to exclude disclosure of information regarding the aggregate amount and future timing of performance obligations that are unsatisfied or partially satisfied as of the end of the reporting period. The Company provides limited warranties on most of its products against certain manufacturing and other defects. Provisions for estimated expenses related to product warranty are made at the time products are sold. Refer to Note 18, “Commitments and Contingencies” for more information.
The following table summarizes total revenue by product category.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Electronic systems | $ | 74,401 | $ | 71,060 | $ | 143,152 | $ | 157,206 | ||||||||
Mechanical systems | 40,920 | 44,206 | 84,238 | 90,048 | ||||||||||||
Exhaust | 17,384 | 18,037 | 33,213 | 37,369 | ||||||||||||
Accessories | 26,382 | 28,353 | 53,847 | 57,099 | ||||||||||||
Safety | 16,175 | 17,764 | 33,017 | 37,753 | ||||||||||||
Net sales | $ | 175,262 | $ | 179,420 | $ | 347,467 | $ | 379,475 |
The following table summarizes total revenue based on geographic location from which the product is shipped:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
United States | $ | 170,817 | $ | 173,514 | $ | 337,235 | $ | 369,573 | ||||||||
Italy | 4,445 | 5,906 | 10,232 | 9,902 | ||||||||||||
Net sales | $ | 175,262 | $ | 179,420 | $ | 347,467 | $ | 379,475 |
12. | INCOME TAXES |
The Company's effective income tax rate is based on expected income, statutory rates and tax planning opportunities available in the various jurisdictions in which it operates. For interim financial reporting, the Company estimates the annual income tax rate based on projected taxable income for the full year and records a quarterly income tax provision or benefit in accordance with the anticipated annual rate. The Company refines the estimates of the year's taxable income as new information becomes available, including actual year-to-date financial results. This continual estimation process often results in a change to the expected effective income tax rate for the year. When this occurs, the Company adjusts the income tax provision during the quarter in which the change in estimate occurs so that the year-to-date provision reflects the expected income tax rate. Significant judgment is required in determining the effective tax rate and in evaluating tax positions.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Income tax expense | $ | 4,098 | $ | 3,023 | $ | 5,664 | $ | 10,211 | ||||||||
Effective tax rates | 24.0 | % | 6.9 | % | 24.7 | % | 15.1 | % |
For the 13-week period ended July 2, 2023, the Company's effective tax rate of 24.0% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period. For the 13-week period ended July 3, 2022, the Company’s effective tax rate of 6.9% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.
For the 26-week period ended July 2, 2023, the Company's effective tax rate of 24.7% differed from the 21% federal statutory rate primarily due to permanent differences related to changes in fair value of the warrant and earn-out liabilities recognized during the period. For the 26-week period ended July 3, 2022, the Company’s effective tax rate of 15.1% differed from the 21% federal statutory rate primarily due a permanent difference related to changes in the fair value of the warrant and earn-out liabilities recognized during the period.
13. | EARNINGS PER SHARE |
The following table sets forth the calculation of basic and diluted earnings per share:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Numerator: | ||||||||||||||||
Net income | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||
Less: fair value adjustment for Warrants | — | — | — | (20,941 | ) | |||||||||||
Net income (loss) - diluted | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 36,480 | ||||||||
Denominator: | ||||||||||||||||
Weighted average common shares outstanding - basic | 117,221,419 | 116,931,623 | 117,187,287 | 116,398,177 | ||||||||||||
Dilutive effect of potential common shares from RSUs | 647,503 | 182,930 | 369,370 | 177,642 | ||||||||||||
Dilutive effect of potential common shares from Warrants | — | — | — | 768,156 | ||||||||||||
Weighted average common shares outstanding - diluted | 117,868,922 | 117,114,553 | 117,556,657 | 117,343,975 | ||||||||||||
Earnings per share: | ||||||||||||||||
Basic | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.49 | ||||||||
Diluted | $ | 0.11 | $ | 0.35 | $ | 0.15 | $ | 0.31 |
The following outstanding shares of Common Stock equivalents were excluded from the calculation of diluted earnings per share because their effect would have been anti-dilutive. Warrants to purchase shares of Common Stock having an exercise price greater than the average share market price are excluded from the calculation of diluted earnings per share.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Anti-dilutive shares excluded from calculation of diluted EPS: | ||||||||||||||||
Warrants | 14,633,311 | 14,633,311 | 14,633,311 | — | ||||||||||||
Stock options | 922,228 | 1,960,708 | 922,228 | 1,960,708 | ||||||||||||
Restricted stock units | 1,224,507 | 220,051 | 1,224,507 | 220,051 | ||||||||||||
Performance stock units | 2,469,412 | — | 2,469,412 | — | ||||||||||||
Unvested Earn-out Shares | 1,093,750 | 1,093,750 | 1,093,750 | 1,093,750 | ||||||||||||
Total anti-dilutive shares | 20,343,208 | 17,907,820 | 20,343,208 | 3,274,509 |
14. | BENEFIT PLANS |
On January 28, 2022, the Company approved the termination of its defined benefit pension plan (the "Plan"), effective March 31, 2022. The final distribution of the Plan's assets pursuant to the termination was made in the fourth quarter of 2022 when the plan termination satisfied all regulatory requirements. Plan participants received their accrued benefits from plan assets by electing either lump sum distributions or annuity contracts with a qualifying third-party annuity provider.
The following table provides the components of net periodic benefit cost for the 13-week and 26-week periods ended July 3, 2022:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||
July 3, 2022 | July 3, 2022 | |||||||
Components of expense: | ||||||||
Service cost | $ | 27 | $ | 54 | ||||
Interest cost | 32 | 64 | ||||||
Expected return on plan assets | (52 | ) | (104 | ) | ||||
Net periodic benefit cost | $ | 7 | $ | 14 |
The Company's contributions to the Plan were $150 for the 26-week period ended July 3, 2022.
The Company made matching contributions totaling $565 and $1,156 to its 401(k) plan during the 13-week periods ended July 2, 2023 and July 3, 2022, respectively. The Company made matching contributions totaling $1,140 and $1,844 to its 401(k) plan during the 26-week periods ended July 2, 2023 and July 3, 2022, respectively.
15. | EQUITY-BASED COMPENSATION PLANS |
In 2021, the Company adopted the 2021 Omnibus Incentive Plan (the “2021 Plan”), under which awards, including stock options, restricted stock units ("RSUs") and performance stock units ("PSUs") may be granted to employees and non-employee directors. The 2021 Plan authorized 8,850,000 shares of Common Stock to be available for award grants. As of July 2, 2023, 4,422,936 shares of Common Stock remained available for future issuance under the 2021 Plan. On June 6, 2023, the Company granted 1,000,000 RSUs and 1,520,000 PSUs to its new President and Chief Executive Officer. These awards were granted outside of the 2021 Plan as employment inducement awards and did not require shareholder approval under the rules of the New York Stock Exchange or otherwise.
Equity-based compensation expense included the following components:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Restricted stock units | $ | 1,167 | $ | 1,350 | $ | 1,815 | $ | 2,533 | ||||||||
Performance stock units | 322 | — | 374 | — | ||||||||||||
Stock options | 317 | 652 | 11 | 1,205 | ||||||||||||
Profit interest units | — | 1,481 | — | 2,907 |
All equity-based compensation expenses are recorded in selling, general and administrative costs in the condensed consolidated statements of comprehensive income.
Restricted Stock Units
The Compensation Committee has awarded RSUs to select employees and non-employee directors. The RSUs vest ratably over one to four years of continued employment. The fair value of a RSU at the grant date is equal to the market price of Common Stock on the grant date. Compensation expense for RSUs is recorded based on amortization of the grant date fair market value over the period the restrictions lapse. As of July 2, 2023, there was $8,849 of unrecognized compensation cost related to unvested RSUs that is expected to be recognized over a remaining weighted average period of 2.5 years. The weighted average grant date fair value for RSUs was $2.75 and $11.46 for the 26-week periods ended July 2, 2023 and July 3, 2022, respectively. The fair value of RSUs vested and converted to shares of Common Stock was $303 for the 26-week period ended July 2, 2023.
The following table summarizes RSU activity for the 26-week period ended July 2, 2023:
Unvested Restricted Stock Units | ||||||||
Weighted | ||||||||
Number of | Average Grant | |||||||
RSUs | Date Fair Value | |||||||
December 31, 2022 | 1,108,330 | $ | 9.43 | |||||
Granted | 2,437,743 | 2.75 | ||||||
Vested | (126,197 | ) | 10.56 | |||||
Forfeited | (189,640 | ) | 12.13 | |||||
July 2, 2023 | 3,230,236 | $ | 3.42 |
Performance Stock Units
The Compensation Committee has awarded PSUs to select employees. The PSUs represent shares of Common Stock that are potentially issuable in the future based on a combination of performance and service requirements. On March 8, 2023, the Company granted 949,412 PSUs under the 2021 Plan to key employees with a grant date fair value of $1.98. The PSUs granted to employees were based on salary and include annual net sales and adjusted EBITDA growth targets with threshold and stretch goals. The awards vest ratably over three years, subject to the employee’s continuous employment through the vesting date and the level of performance achieved. The number of PSUs granted reflects the target number able to be earned under a given award. Non-vested PSU compensation expense is based on the most recent performance assumption available and is adjusted as assumptions change. The fair value of a PSU at the grant date is equal to the market price of Common Stock on the grant date. The cost estimates for PSU grants represent initial target awards until the Company can reasonably forecast the financial performance of each PSU award grant. The actual number of shares of Common Stock to be issued at the end of each performance period will range from 0% to 150% of the initial target awards.
On June 6, 2023, the Company granted 1,520,000 PSUs to its new President and Chief Executive Officer as an employment inducement award, which are potentially issuable in the future based on a combination of achievement of certain stock price metrics and service requirements through the expiration date of December 31, 2030. The fair value of this award is determined using a Monte Carlo simulation as of the date of the grant and share-based compensation expense will not be adjusted should the target awards vary from actual awards. The Company's estimates of fair value may be impacted by certain variables including, but not limited to, stock price volatility, the risk-free interest rate, expected dividend yields, and the Company's performance.
As of July 2, 2023, there was $4,397 of unrecognized compensation cost related to unvested PSUs that is expected to be recognized over a remaining weighted average period of 2.35 years.
Stock Options
Stock option grants have an exercise price at least equal to the market value of the underlying Common Stock on the date of grant, have ten-year terms, and vest ratably over three years of continued employment. In general, vested options expire if not exercised within 90 days of termination of service. Compensation expense for stock options is recorded based on straight-line amortization of the grant date fair value over the requisite service period. As of July 2, 2023, there was $1,611 of unrecognized compensation cost related to unvested stock options that is expected to be recognized over a remaining weighted-average period of 1.3 years.
The following table summarizes stock option activity for the 26-week period ended July 2, 2023:
Weighted Average | ||||||||||||
Weighted | Remaining | |||||||||||
Number of | Average | Contractual | ||||||||||
Stock Options | Exercise Price | Term (years) | ||||||||||
Options outstanding on December 31, 2022 | 1,709,690 | $ | 10.97 | |||||||||
Forfeited | (592,588 | ) | 11.11 | |||||||||
Expired | (194,874 | ) | 10.50 | |||||||||
Options outstanding on July 2, 2023 | 922,228 | $ | 10.98 | 8.26 | ||||||||
Options exercisable on, July 2, 2023 | 307,401 | $ | 10.98 | 8.26 |
Profit Interest Units
The Holley Stockholder authorized an incentive pool of 41,400,000 units of Holley Stockholder that its management had the right to grant to certain employees of the Company. The units, which are designated as Profit Interest Units (“PIUs”), are a special type of limited liability company equity unit that allows the recipient to potentially participate in a future increase in the value of the Company. The PIUs were issued for no consideration and generally provided for vesting over a requisite service period, subject to the recipient remaining an employee of the Company through each vesting date.
In the fourth quarter of 2022, the Holley Stockholder amended the vesting criteria to allow for immediate vesting of all outstanding and unvested PIUs. The changes to these awards were deemed to be modification events under ASC Subtopic 718-10,Stock Compensation. Accordingly, during the fourth quarter of 2022, the Company recognized catch-up equity-based compensation expense, including incremental fair value resulting from the modification, as applicable to each award grant. At that time all PIUs were fully vested with no remaining unrecognized compensation cost, and there are no remaining PIUs authorized for issuance.
16. | LEASE COMMITMENTS |
On January 1, 2022, the Company adopted ASC Topic 842,Leases, using the modified retrospective optional transition method provided by ASU 2018-11,Leases (Topic 842). The effect of applying this guidance resulted in an increase in noncurrent assets for right-of-use assets of $33,887 and an increase in liabilities for associated lease obligations of $34,579, most of which were classified as noncurrent. The adoption of the standard did not result in a cumulative-effect adjustment to the opening balance of retained earnings.
Under the transition option elected by the Company, ASC Topic 842 is applied only to the most current period and reporting for comparative periods presented in the financial statements were issued. Other than as describedcontinues to be in these condensed financial statements,accordance with ASC Topic 840,Leases, including disclosures. Upon adoption, the Company did elected the following practical expedients related to ASC 842:
• | not reassess whether any expired or existing contracts are or contain leases, not reassess the lease classification for any expired or existing leases, and not reassess initial direct costs for any existing leases; | |
• | to account for the lease and non-lease components as a single lease component for all of the Company's leases; and | |
• | to apply accounting similar to ASC Topic 840 to leases that meet the definition of short-term leases. |
The Company leases retail stores, manufacturing, distribution, engineering, and research and development facilities, office space, equipment, and automobiles under operating lease agreements. Leases have remaining lease terms of one to 11 years, inclusive of renewal options that the Company is reasonably certain to exercise.
The following table summarizes operating lease assets and obligations, and provides information associated with the measurement of operating lease obligations.
As of | ||||||||
July 2, 2023 | December 31, 2022 | |||||||
Assets: | ||||||||
Operating right of use assets | $ | 28,965 | $ | 29,522 | ||||
Liabilities: | ||||||||
Current operating lease liabilities - Accrued liabilities | $ | 5,112 | $ | 5,112 | ||||
Long-term operating lease liabilities | 24,589 | 24,992 | ||||||
Total lease liabilities | $ | 29,701 | $ | 30,104 | ||||
Lease term and discount rate | ||||||||
Weighted average remaining lease term (in years) | 7.6 | 7.9 | ||||||
Weighted average discount rate | 5.91 | % | 5.77 | % |
The following summarizes the components of operating lease expense and provides supplemental cash flow information for operating leases:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Components of lease expense: | ||||||||||||||||
Operating lease expense | $ | 1,707 | $ | 1,482 | $ | 3,293 | $ | 3,901 | ||||||||
Short-term lease expense | 466 | 642 | 978 | 1,250 | ||||||||||||
Variable lease expense | 17 | 327 | 169 | 414 | ||||||||||||
Total lease expense | $ | 2,190 | $ | 2,451 | $ | 4,440 | $ | 5,565 | ||||||||
Supplemental cash flow information related to leases: | ||||||||||||||||
Cash paid for amounts included in measurement of operating lease liabilities | $ | 1,720 | $ | 1,821 | $ | 3,471 | $ | 3,581 | ||||||||
Right-of-use assets obtained in exchange for new operating lease liabilities | 2,354 | 13,491 | 2,354 | 13,769 | ||||||||||||
Decapitalization of right-of-use assets upon lease termination or modification | 154 | 12,178 | 154 | 12,178 |
The following table summarizes the maturities of the Company's operating lease liabilities as of July 2, 2023:
2023 (excluding the twenty-six weeks ended July 2, 2023) | $ | 3,434 | ||
2024 | 5,964 | |||
2025 | 4,433 | |||
2026 | 4,236 | |||
2027 | 4,182 | |||
Thereafter | 15,035 | |||
Total lease payments | 37,284 | |||
Less imputed interest | (7,583 | ) | ||
Present value of lease liabilities | $ | 29,701 |
17. | ACQUISITION, RESTRUCTURING AND MANAGEMENT FEE COSTS |
The following table summarizes the Company's total acquisition, restructuring and management fee costs:
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Acquisitions (1) | $ | — | $ | 1,372 | $ | — | $ | 1,621 | ||||||||
Restructuring (2) | 352 | 319 | 1,691 | 360 | ||||||||||||
Total acquisition, restructuring and management fees | $ | 352 | $ | 1,691 | $ | 1,691 | $ | 1,981 | ||||||||
(1) Includes professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to acquisitions. | ||||||||||||||||
(2) Includes costs incurred as part of the restructuring of operations including professional and consulting services and executive severance. |
18. | COMMITMENTS AND CONTINGENCIES |
The Company is a party to various lawsuits and claims in the normal course of business. While the lawsuits and claims against the Company cannot be predicted with certainty, management believes that the ultimate resolution of such matters will not identify have a material effect on the consolidated financial position or liquidity of the Company; however, in light of the inherent uncertainties involved in such lawsuits and claims, some of which may be beyond the Company’s control, an adverse outcome in one or more of these matters could be material to the Company’s results of operations or cash flows for any additional subsequent events that would have required adjustment or disclosureparticular reporting period.
The Company generally warrants its products against certain manufacturing and other defects. These product warranties are provided for specific periods of time depending on the nature of the product. The accrued product warranty costs are based primarily on historical experience of actual warranty claims and are recorded at the time of the sale.
The following table provides the changes in the Company's accrual for product warranties, which is classified as a component of accrued liabilities in the condensed financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSconsolidated balance sheets.
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Beginning balance | $ | 3,181 | $ | 3,816 | $ | 3,584 | $ | 3,994 | ||||||||
Accrued for current year warranty claims | 3,513 | 446 | 6,467 | 3,034 | ||||||||||||
Settlement of warranty claims | (2,818 | ) | (1,937 | ) | (6,175 | ) | (4,703 | ) | ||||||||
Ending balance | $ | 3,876 | $ | 2,325 | $ | 3,876 | $ | 2,325 |
References in this report (the “Quarterly Report”) to “we,” “us” or the “Company” refer to Empower Ltd. References to our “management” or our “management team” refer to our officers and directors, and references to the “Sponsor” refer to Empower Sponsor Holdings LLC. The following discussion and analysis
Special Note Regarding Forward-Looking Statements
This Quarterly Report includes “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act that are not historical facts, and involve risks and uncertainties that could cause actual results to differ materially from those expected and projected. All statements, other than statements of historical fact included in this Form 10-Q including, without limitation, statements in this “Management’sItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” regardingOperations.
Unless the Company’scontext requires otherwise, references to “Holley,”“we,”“us,”“our” and “the Company” in this section are to the business and operations of Holley Inc. and its subsidiaries unless the context otherwise indicates. The following discussion and analysis should be read in conjunction with Holley’s condensed consolidated financial position, business strategy, potential business combinationsstatements and the plans and objectives of management for future operations, are forward-looking statements. Words such as “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intends,” “may,” “might,” “plan,” “possible,” “potential,” “predict,” “project,” “should,” “would” and variations thereof and similar words and expressions are intendedrelated notes thereto included in this Quarterly Report on Form 10-Q. In addition to identify such forward-looking statements. Suchhistorical information, this discussion contains forward-looking statements relate to future events or future performance, but reflect management’s current beliefs, based on information currently availablethat involve risks, uncertainties, and are subject to risks and uncertainties. A number of factorsassumptions that could cause actual events, performance or results to differ materially from the events, performance and results discussed in the forward-looking statements, including risks related to the impact of the COVID-19 global pandemic, including the actions of governments, businesses and individuals in response to the situation. For information identifying important factors that could causeHolley’s actual results to differ materially from those anticipatedmanagement’s expectations. Factors that could cause such differences are discussed herein and under the caption, “Cautionary Note Regarding Forward-Looking Statements.”
Overview
We are a leading designer, marketer, and manufacturer of high performance automotive aftermarket products serving car and truck enthusiasts, with sales, processing, and distribution facilities reaching most major markets in the forward-looking statements, please referUnited States, Canada, Europe and China. We design, market, manufacture and distribute a diversified line of performance automotive products including fuel injection systems, tuners, exhaust products, carburetors, safety equipment and various other performance automotive products. Our products are designed to enhance street, off-road, recreational and competitive vehicle performance and safety.
Innovation is at the Risk core of our business and growth strategy. We have a history of developing innovative products, including new products in existing product families, product line expansions, and accessories, as well as products that bring us into new categories. We have thoughtfully expanded our product portfolio over time to adapt to consumer needs.
In addition, we have historically used strategic acquisitions to (i) expand our brand portfolio, (ii) enter new product categories and consumer segments, (iii) increase direct-to-consumer (“DTC”) scale and connection, (iv) expand share in current product categories and (v) realize value-enhancing revenue and cost synergies. While we believe our business is positioned for continued organic growth, we intend to continue evaluating opportunities for strategic acquisitions that would complement our current business and expand our addressable target market.
Factors sectionAffecting our Performance
We believe that our performance and future success depend on a number of factors that present significant opportunities for us but also pose risks and challenges, including those discussed below, under the Company’s final prospectuscaption, "Cautionary Note Regarding Forward-Looking Statements," in this Quarterly Report on Form 10-Q, under the caption, “Risk Factors,” in our Annual Report on Form 10-K for its Initial Public Offeringthe year ended December 31, 2022, as filed with the SEC on October 7, 2020. March 15, 2023, and in our subsequent filings with the SEC.
Business Environment
Our business and results of operations, financial condition, and liquidity are impacted by broad economic conditions including inflation, labor shortages, and disruption of the supply chain, as well as by geopolitical events, such as the conflict in Ukraine. Our operations have been adversely impacted by inflationary pressures primarily related to transportation, labor and component costs. Sales growth in certain products has been constrained by continuing supply chain challenges and automotive electronic component shortages. In response to the global supply chain volatility and inflationary impacts, we have attempted to minimize potential adverse impacts on our business with cost savings initiatives, price increases to customers, and by increasing inventory levels of certain products and working closely with our suppliers and customers to minimize disruptions in delivering products to customers. Our profitability has been, and may continue to be, adversely affected by constrained consumer demand, a shift in sales mix to lower-margin products, and demands on our performance that increased our costs. Should the ongoing macroeconomic conditions not improve, or worsen, or if our attempts to mitigate the impact on our supply chain, operations and costs is not successful, our business, results of operations and financial condition may be adversely affected.
Key Components of Results of Operations
Net Sales
The Company’s securities filings can be accessedprincipal activity from which we generate sales is the designing, marketing, manufacturing and distribution of performance after-market automotive parts for our end consumers. Sales are displayed net of rebates and sales returns allowances. Sales returns are recorded as a charge against gross sales in the period in which the related sales are recognized.
Cost of Goods Sold
Cost of goods sold consists primarily of the cost of purchased parts and manufactured products, including materials and direct labor costs. In addition, warranty, incoming shipping and handling and inspection and repair costs are also included within costs of goods sold. Reductions in the cost of inventory to its net realizable value are also a component of cost of goods sold.
Selling, General, and Administrative
Selling, general, and administrative costs consist of payroll and related personnel expenses, IT and office services, office rent expense and professional services. In addition, self-insurance, advertising, research and development, outgoing shipping costs, pre-production and start-up costs are also included within selling, general, and administrative.
Acquisition and Restructuring Costs
Acquisition and restructuring costs consist of professional fees for legal, accounting, consulting, administrative, and other professional services directly attributable to potential acquisitions. In addition, operational restructuring costs and executive severance are included within this classification.
Interest Expense
Interest expense consists of interest due on the EDGAR sectionindebtedness under our credit facilities. Interest is based on SOFR or the base rate, at the Company's election, plus the applicable margin rate. As of July 2, 2023, $645.6 million was outstanding under our Credit Agreement.
Results of Operations
13-Week Period Ended July 2, 2023Compared With 13-Week Period Ended July 3, 2022
The table below presents Holley’s results of operations for the SEC’s website13-week periods ended July 2, 2023 and July 3, 2022 (dollars in thousands):
For the thirteen weeks ended | ||||||||||||||||
July 2, 2023 | July 3, 2022 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 175,262 | $ | 179,420 | $ | (4,158 | ) | (2.3 | %) | |||||||
Cost of goods sold | 105,514 | 104,132 | 1,382 | 1.3 | % | |||||||||||
Gross profit | 69,748 | 75,288 | (5,540 | ) | (7.4 | %) | ||||||||||
Selling, general, and administrative | 29,101 | 36,269 | (7,168 | ) | (19.8 | %) | ||||||||||
Research and development costs | 6,182 | 8,196 | (2,014 | ) | (24.6 | %) | ||||||||||
Amortization of intangible assets | 3,674 | 3,662 | 12 | 0.3 | % | |||||||||||
Acquisition and restructuring costs | 352 | 1,691 | (1,339 | ) | (79.2 | %) | ||||||||||
Other expense | 485 | 325 | 160 | 49.2 | % | |||||||||||
Operating income | 29,954 | 25,145 | 4,809 | 19.1 | % | |||||||||||
Change in fair value of warrant liability | 2,017 | (23,168 | ) | 25,185 | (108.7 | %) | ||||||||||
Change in fair value of earn-out liability | 961 | (4,234 | ) | 5,195 | (122.7 | %) | ||||||||||
Interest expense | 9,899 | 8,961 | 938 | 10.5 | % | |||||||||||
Income before income taxes | 17,077 | 43,586 | (26,509 | ) | (60.8 | %) | ||||||||||
Income tax expense | 4,098 | 3,023 | 1,075 | 35.6 | % | |||||||||||
Net income | 12,979 | 40,563 | (27,584 | ) | (68.0 | %) | ||||||||||
Foreign currency translation adjustment | 272 | 501 | (229 | ) | (45.7 | %) | ||||||||||
Total comprehensive income | $ | 13,251 | $ | 41,064 | $ | (27,813 | ) | (67.7 | %) |
Net Sales
Net sales for the 13-week period ended July 2, 2023 decreased $4.2 million, or 2.3%, to $175.3 million, as compared to $179.4 million for the 13-week period ended July 3, 2022. Non-comparable sales associated with acquisitions contributed $2.6 million, or 1.5% of year-over-year growth. The remaining comparable sales decreased by $6.8 million, or 3.8%, compared to the prior year quarter, offsetting the impact from the acquisitions. The decline in comparable sales reflects a return to the sales trends experienced prior to the increased demand we experienced during the COVID pandemic. As a result, lower unit volume drove a decrease of approximately $10.9 million that was partially offset by improved price realization of approximately $4.1 million compared to the prior year period. Major categories driving the comparable year-over-year results include a decrease in safety products sales of $4.2 million (23.7% category decline), a decrease in mechanical systems sales of $3.3 million (7.4% category decline), a decrease in accessories sales of $2.0 million (7.0% category decline), and an increase in electronic systems sales of $3.3 million (4.7% category growth).
Cost of Goods Sold
Cost of goods sold for the 13-week period ended July 2, 2023 increased $1.4 million, or 1.3%, to $105.5 million, as compared to $104.1 million for the 13-week period ended July 3, 2022. The increase in cost of goods sold during the 13-week period ended July 2, 2023 in which product sales decreased 2.3% reflects compression in gross profit margin due primarily to inflationary pressures on labor and component costs.
Gross Profit and Gross Margin
Selling, General and Administrative
Selling, general and administrative costs for the 13-week period ended July 2, 2023 decreased $7.2 million, or 19.8%, to $29.1 million, as compared to $36.3 million for the 13-week period ended July 3, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 16.6% of sales for the 13-week period ended July 2, 2023 compared to 20.2% of sales in 2022. The decrease in selling, general and administrative costs was driven by a $1.7 million decrease in equity compensation costs, a $1.7 million decrease in personnel costs, and a $1.2 million decrease in outbound shipping and handling costs, reflecting the implementation of cost-saving initiatives.
Research and Development Costs
Research and development costs for the 13-week period ended July 2, 2023 decreased $2.0 million, or 24.6%, to $6.2 million, as compared to $8.2 million for the 13-week period ended July 3, 2022. The decrease in research and development costs was primarily due to headcount reductions, reflecting the implementation of cost-saving initiatives.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was stable at www.sec.gov. Except$3.7 million for both the 13-week periods ended July 2, 2023 and July 3, 2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 13-week period ended July 2, 2023 decreased $1.3 million to $0.4 million, as expressly required by applicable securities law,compared to $1.7 million for the Company disclaims any intention or obligation to update or revise any forward-looking statements whether as13-week period ended July 3, 2022. This decrease primarily reflects a reduction in restructuring activities associated with acquisitions.
Operating Income
As a result of new information, future eventsfactors described above, operating income for the 13-week period ended July 2, 2023 increased $4.8 million, or otherwise.19.1%, to $30.0 million, as compared to $25.2 million for the 13-week period ended July 3, 2022.
OverviewChange in Fair Value of Warrant Liability
We areFor the 13-week period ended July 2, 2023, we recognized a blank check company incorporated in the Cayman Islands on August 19, 2020 formed for the purposeloss of effecting a merger, amalgamation, share exchange, asset acquisition, share purchase, reorganization or other similar Business Combination with one or more businesses. We intend to effectuate our Business Combination using cash derived$2.0 million from the proceedschange in fair value of the Initial Public Offering andwarrant liability. For the sale13-week period ended July 3, 2022, we recognized a gain of $23.2 million from the change in fair value of the Private Placementwarrant liability. The warrant liability reflects the fair value of the Warrants our shares, debt or a combination of cash, shares and debt.
We expect to continue to incur significant costs in the pursuit of our acquisition plans. We cannot assure you that our plans to complete a Business Combination will be successful.
Results of Operations
We have neither engaged in any operations nor generated any operating revenues to date. Our only activities from inception through September 30, 2020 were organizational activities and those necessary to prepare for the Initial Public Offering, described below. We do not expect to generate any operating revenues until after the completion of our initial Business Combination. We expect to generate non-operating income in the form of interest income on marketable securities held after the Initial Public Offering. We expect that we will incur increased expenses as a result of being a public company (for legal, financial reporting, accounting and auditing compliance), as well as for due diligence expensesissued in connection with searching for, and completing, athe Business Combination.
For the period from August 19, 2020 (inception) through September 30, 2020, we had a net lossChange in Fair Value of $5,000, which consisted of formation costs.Earn-Out Liability
Liquidity and Capital ResourcesFor the 13-week period ended July 2, 2023, we recognized a loss of $1.0 million from the change in fair value of the earn-out liability. For the 13-week period ended July 3, 2022, we recognized a gain of $4.2 million, from the change in fair value of the earn-out liability. The earn-out liability reflects the fair value of the unvested Earn-out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 13-week period ended July 2, 2023 increased $0.9 million, or 10.5%, to $9.9 million, as compared to $9.0 million for the 13-week period ended July 3, 2022, reflecting a higher effective interest rate net of a $5.1 million fair value adjustment of the interest rate collar.
Income before Income Taxes
As a result of September 30, 2020,factors described above, we had no cash. Untilrecognized $17.1 million of income before income taxes for the consummation13-week period ended July 2, 2023, as compared to income before income taxes of $43.6 million for the 13-week period ended July 3, 2022.
Income Tax Expense
Income tax expense for the 13-week period ended July 2, 2023 was $4.1 million, as compared to income tax expense of $3.0 million for the 13-week period ended July 3, 2022. Our effective tax rate for the 13-week period ended July 2, 2023 was 24.0%. The difference between the effective tax rate for the 13-week period ended July 2, 2023 and the federal statutory rate in 2023 was primarily due to permanent differences resulting from the change in fair value of the Initial Public Offering, our only sourcewarrant and earn-out liabilities. Our effective tax rate for the 13-week period ended July 3, 2022 was 6.9%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to permanent differences resulting from the change in fair value of liquiditythe warrant and earn-out liabilities.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $13.0 million for the 13-week period ended July 2, 2023, as compared to net income of $40.6 million for the 13-week period ended July 3, 2022. Additionally, we recognized total comprehensive income of $13.3 million for the 13-week period ended July 2, 2023, as compared to total comprehensive income of $41.1 million for the 13-week period ended July 3, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.
26-Week Period Ended July 2, 2023Compared With 26-Week Period Ended July 3, 2022
The table below presents Holley’s results of operations for the 26-week periods ended July 2, 2023 and July 3, 2022 (dollars in thousands):
For the twenty-six weeks ended | ||||||||||||||||
July 2, 2023 | July 3, 2022 | Change ($) | Change (%) | |||||||||||||
Net sales | $ | 347,467 | $ | 379,475 | $ | (32,008 | ) | (8.4 | %) | |||||||
Cost of goods sold | 210,006 | 221,466 | (11,460 | ) | (5.2 | %) | ||||||||||
Gross profit | 137,461 | 158,009 | (20,548 | ) | (13.0 | %) | ||||||||||
Selling, general, and administrative | 59,118 | 70,611 | (11,493 | ) | (16.3 | %) | ||||||||||
Research and development costs | 12,835 | 16,357 | (3,522 | ) | (21.5 | %) | ||||||||||
Amortization of intangible assets | 7,353 | 7,323 | 30 | 0.4 | % | |||||||||||
Acquisition and restructuring costs | 1,691 | 1,981 | (290 | ) | (14.6 | %) | ||||||||||
Other expense | 536 | 547 | (11 | ) | (2.0 | %) | ||||||||||
Operating income | 55,928 | 61,190 | (5,262 | ) | (8.6 | %) | ||||||||||
Change in fair value of warrant liability | 3,452 | (20,941 | ) | 24,393 | (116.5 | %) | ||||||||||
Change in fair value of earn-out liability | 1,389 | (1,853 | ) | 3,242 | (175.0 | %) | ||||||||||
Interest expense | 28,197 | 16,352 | 11,845 | 72.4 | % | |||||||||||
Income before income taxes | 22,890 | 67,632 | (44,742 | ) | (66.2 | %) | ||||||||||
Income tax expense | 5,664 | 10,211 | (4,547 | ) | (44.5 | %) | ||||||||||
Net income | 17,226 | 57,421 | (40,195 | ) | (70.0 | %) | ||||||||||
Foreign currency translation adjustment | 73 | 742 | (669 | ) | (90.2 | %) | ||||||||||
Total comprehensive income | $ | 17,299 | $ | 58,163 | $ | (40,864 | ) | (70.3 | %) |
Net Sales
Net sales for the 26-week period ended July 2, 2023 decreased $32.0 million, or 8.4%, to $347.5 million, as compared to $379.5 million for the 26-week period ended July 3, 2022. Non-comparable sales associated with acquisitions contributed $4.4 million, or 1.2% of total year-over-year growth. The remaining comparable sales for the year-to-date period decreased by $36.4 million, or 9.6%, offsetting the impact from the acquisitions. The decline in comparable sales was an initial purchasedriven by supply chain constraints in electronic components and a return to the sales trends experienced prior to the increased demand experienced during the COVID pandemic. As a result, lower unit volume drove a decrease of ordinary sharesapproximately $47.5 million that was partially offset by improved price realization of approximately $11.2 million compared to the prior year period. Comparable year-over-year results by category include a decrease in electronic systems sales of $14.1 million (8.9% category decline), a decrease in safety products sales of $9.1 million (24.1% category decline), a decrease in mechanical systems sales of $5.8 million (6.5% category decline), a decrease in exhaust system sales of $4.2 million (11.1% category decline), and a decrease in accessories sales of $3.2 million (5.7% category decline).
Cost of Goods Sold
Cost of goods sold for the 26-week period ended July 2, 2023 decreased $11.5 million, or 5.2%, to $210.0 million, as compared to $221.5 million for the 26-week period ended July 3, 2022. The decrease in cost of goods sold during the 26-week period ended July 2, 2023 reflects the decrease in product sales during such period combined with compression in gross profit margin due primarily to inflationary pressures on labor and component costs.
Gross Profit and Gross Margin
Selling, General and Administrative
SubsequentSelling, general and administrative costs for the 26-week period ended July 2, 2023 decreased $11.5 million, or 16.3%, to $59.1 million, as compared to $70.6 million for the end26-week period ended July 3, 2022. When expressed as a percentage of sales, selling, general and administrative costs decreased to 17.0% of sales for the 26-week period ended July 2, 2023 compared to 18.6% of sales in 2022. The decrease in selling, general and administrative costs was driven by a $4.4 million decrease in equity compensation costs and a $3.9 million decrease in personnel costs, reflecting the implementation of cost-saving initiatives.
Research and Development Costs
Research and development costs for the 26-week period ended July 2, 2023 decreased $3.5 million, or 21.5%, to $12.8 million, as compared to $16.4 million for the 26-week period ended July 3, 2022. The decrease in research and development costs was primarily due to headcount reductions, reflecting the implementation of cost-saving initiatives.
Amortization and Impairment of Intangible Assets
Amortization of intangible assets was $7.4 million for the 26-week period ended July 2, 2023 compared to $7.3 million for the 26-week period ended July 3, 2022.
Acquisition and Restructuring Costs
Acquisition and restructuring costs for the 26-week period ended July 2, 2023 decreased $0.3 million to $1.7 million, as compared to $2.0 million for the 26-week period ended July 3, 2022. This decrease primarily reflects a reduction in restructuring activities associated with acquisitions.
Operating Income
As a result of factors described above, operating income for the 26-week period ended July 2, 2023 decreased $5.3 million, or 8.6%, to $55.9 million, as compared to $61.2 million for the 26-week period ended July 3, 2022.
Change in Fair Value of Warrant Liability
For the 26-week period ended July 2, 2023 we recognized a loss of $3.5 million from the change in fair value of the quarterlywarrant liability. For the 26-week period covered by this Quarterly Report, on October 9, 2020,ended July 3, 2022 we consummatedrecognized a gain of $20.9 million from the Initial Public Offering of 25,000,000 Units, at a price of $10.00 per Unit, generating gross proceeds of $250,000,000. Simultaneously with the closingchange in fair value of the Initial Public Offering, we consummatedwarrant liability. The warrant liability reflects the sale of 4,666,667 Private Placement Warrants to the Sponsor at a price of $1.50 per Private Placement Warrant generating gross proceeds of $7,000,000.
Following the Initial Public Offering, and the salefair value of the Private Placement Warrants a total of $250,000,000 was placedissued in connection with the Trust Account, and we had $1,122,742 of cash held outside of the Trust Account, after payment of costs related to the Initial Public Offering, and available for working capital purposes. We incurred $14,215,163 in transaction costs, including $5,000,000 of underwriting fees, $8,750,000 of deferred underwriting fees and $465,163 of other costs.
We intend to use substantially all of the funds held in the Trust Account, including any amounts representing interest earned on the Trust Account, which interest shall be net of taxes payable and excluding deferred underwriting commissions, to complete our Business Combination. We may withdraw interest from the Trust Account to pay taxes, if any. To the extent that our share capital or debt is used, in whole or in part, as consideration to complete a Business Combination, the remaining proceeds held in the Trust Account will be used as working capital to finance the operations of the target business or businesses, make other acquisitions and pursue our growth strategies.
We intend to use the funds held outside the Trust Account primarily to identify and evaluate target businesses, perform business due diligence on prospective target businesses, travel to and from the offices, plants or similar locations of prospective target businesses or their representatives or owners, review corporate documents and material agreements of prospective target businesses, structure, negotiate and complete a Business Combination.
In order to fund working capital deficiencies or finance transaction costsChange in connection withFair Value of Earn-Out Liability
For the 26-week period ended July 2, 2023 we recognized a Business Combination, our Sponsor or an affiliateloss of our Sponsor or certain of our officers and directors may, but are not obligated to, loan us funds as may be required. If we complete a Business Combination, we may repay such loaned amounts out$1.4 million from the change in fair value of the proceedsearn-out liability. For the 26-week period ended July 3, 2022 we recognized a gain of $1.9 million from the change in fair value of earn-out liability. The earn-out liability reflects the fair value of the Trust Account releasedunvested Earn-out Shares resulting from the Business Combination.
Interest Expense
Interest expense for the 26-week period ended July 2, 2023 increased $11.9 million, or 72.4%, to us. In$28.2 million, as compared to $16.4 million for the event that26-week period ended July 3, 2022, reflecting a Business Combination does not close,higher effective interest rate.
Income before Income Taxes
As a result of factors described above, we may use a portionrecognized $22.9 million of income before income taxes for the 26-week period ended July 2, 2023, as compared to income before income taxes of $67.6 million for the 26-week period ended July 3, 2022.
Income Tax Expense
Income tax expense for the 26-week period ended July 2, 2023 was $5.7 million, as compared to income tax expense of $10.2 million for the 26-week period ended July 3, 2022. Our effective tax rate for the 26-week period ended July 2, 2023 was 24.7%. The difference between the effective tax rate for the 26-week period ended July 2, 2023 and the federal statutory rate in 2023 was primarily due to permanent differences resulting from the change in fair value of the working capital held outsidewarrant and earn-out liabilities. Our effective tax rate for the Trust Account26-week period ended July 3, 2022 was 15.1%. The difference between the effective tax rate and the federal statutory rate in 2022 was primarily due to repay such loaned amounts, but no proceedspermanent differences resulting from our Trust Account would be used for such repayment. Up to $2,000,000 of such loans may be convertible into warrants, at a price of $1.50 per warrant, at the optionchange in fair value of the lender. The warrants would be identicalwarrant and earn-out liabilities.
Net Income and Total Comprehensive Income
As a result of factors described above, we recognized net income of $17.2 million for the 26-week period ended July 2, 2023, as compared to net income of $57.4 million for the Private Placement Warrants.26-week period ended July 3, 2022. Additionally, we recognized total comprehensive income of $17.3 million for the 26-week period ended July 2, 2023, as compared to total comprehensive income of $58.2 million for the 26-week period ended July 3, 2022. Comprehensive income includes the effect of foreign currency translation adjustments.
Non-GAAP Financial Measures
We present EBITDA and Adjusted EBITDA as supplemental measures of our operating performance, and believe that such non-GAAP financial measures provide useful information to investors, because they exclude the impact of certain items that we do not consider indicative of our ongoing operating performance and are useful in comparing the Company’s results of operations between periods. We believe we will needthat the presentation of EBITDA and Adjusted EBITDA enhances the usefulness of our financial information by presenting measures that management uses internally to raise additional funds in orderestablish forecasts, budgets and operational goals to meet the expenditures required for operatingmanage and monitor our business for at least the next 12 months. However, if our estimatebusiness. We believe that these non-GAAP financial measures help to depict a more realistic representation of the costs of identifying a target business, undertaking in-depth due diligence and negotiating a Business Combination are less than the actual amount necessary to do so, we may have insufficient funds available to operate our business prior to our initial Business Combination. Moreover, we may need to obtain additional financing either to complete our Business Combination or because we become obligated to redeem a significant numberperformance of our public shares upon completion of our Business Combination, in which case we may issue additional securities or incur debt in connection with such Business Combination.
Off-Balance Sheet Financing Arrangementsunderlying business, enabling us to evaluate and plan more effectively for the future.
We have no obligations,define EBITDA as earnings before depreciation, amortization of intangible assets, interest expense, and income tax expense. We define Adjusted EBITDA as EBITDA adjusted to exclude, to the extent applicable, acquisition and restructuring costs, which includes transaction fees and expenses, termination related benefits, facilities relocation, and executive transition costs; changes in the fair value of the warrant liability; changes in the fair value of the earn-out liability; equity-based compensation expense; impairment of intangible assets; gain or liabilities,loss on the early extinguishment of debt; non-cash charges due to a product rationalization initiative aimed at eliminating unprofitable or slow-moving stock keeping units, for which would be considered off-balance sheet arrangements asa partial reversal of September 30, 2020. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities,the initial reserve was recognized during the thirteen weeks ended July 2, 2023; notable items, which would have been established for the purposetwenty-six weeks ended July 3, 2022 includes a non-cash adjustment related to the adoption of facilitating off-balance sheet arrangements. We have not entered into any off-balance sheet financing arrangements, established any special purpose entities, guaranteed any debtASC 842, “Leases,” and may also include certain fees and settlements; and other expenses or commitmentsgains, which includes gains or losses from disposal of other entities, or purchased any non-financial assets.fixed assets and foreign currency transactions.
Contractual Obligations
We doEBITDA and Adjusted EBITDA are not have any long-term debt, capital lease obligations, operating lease obligations or long-term liabilities, other than described below.
The underwriter is entitled to a deferred fee of $0.35 per Unit, or $8,750,000prepared in the aggregate (or $10,062,500 if the underwriters’ over-allotment is exercised in full). The deferred fee will become payable to the underwriters from the amounts held in the Trust Account solely in the event that we complete a Business Combination, subject to the terms of the underwriting agreement.
Critical Accounting Policies
The preparation of condensed financial statements and related disclosures in conformityaccordance with accounting principles generally accepted in the United States (“GAAP”) and may be different from non-GAAP financial measures used by other companies. These measures should not be considered as measures of Americafinancial performance under GAAP, and the items excluded from or included in these metrics are significant components in understanding and assessing Holley’s financial performance. These metrics should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP.
The following unaudited table presents the reconciliation of net income, the most directly comparable GAAP measure, to EBITDA and Adjusted EBITDA for the 13-week and 26-week periods ended July 2, 2023 and July 3, 2022 (dollars in thousands):
For the thirteen weeks ended | For the twenty-six weeks ended | |||||||||||||||
July 2, 2023 | July 3, 2022 | July 2, 2023 | July 3, 2022 | |||||||||||||
Net income | $ | 12,979 | $ | 40,563 | $ | 17,226 | $ | 57,421 | ||||||||
Adjustments: | ||||||||||||||||
Depreciation | 2,468 | 2,523 | 4,953 | 4,663 | ||||||||||||
Amortization of intangible assets | 3,674 | 3,662 | 7,353 | 7,323 | ||||||||||||
Interest expense | 9,899 | 8,961 | 28,197 | 16,352 | ||||||||||||
Income tax expense | 4,098 | 3,023 | 5,664 | 10,211 | ||||||||||||
EBITDA | 33,118 | 58,732 | 63,393 | 95,970 | ||||||||||||
Acquisition and restructuring costs | 352 | 1,691 | 1,691 | 1,981 | ||||||||||||
Change in fair value of warrant liability | 2,017 | (23,168 | ) | 3,452 | (20,941 | ) | ||||||||||
Change in fair value of earn-out liability | 961 | (4,234 | ) | 1,389 | (1,853 | ) | ||||||||||
Equity-based compensation expense | 1,806 | 3,483 | 2,200 | 6,645 | ||||||||||||
Product rationalization | (800 | ) | — | (800 | ) | — | ||||||||||
Notable items | (16 | ) | 378 | 8 | 884 | |||||||||||
Other expense | 485 | 325 | 536 | 547 | ||||||||||||
Adjusted EBITDA | $ | 37,923 | $ | 37,207 | $ | 71,869 | $ | 83,233 |
Liquidity and Capital Resources
Our primary cash needs are to support working capital, capital expenditures, acquisitions, and debt repayments. We have generally financed our historical needs with operating cash flows, capital contributions and borrowings under our credit facilities. These sources of liquidity may be impacted by various factors, including demand for our products, investments made in acquired businesses, plant and equipment and other capital expenditures, and expenditures on general infrastructure and information technology.
As of July 2, 2023, the Company had cash of $42.7 million and availability of $123.3 million under its revolving credit facility. The Company has a senior secured revolving credit facility with $125 million in borrowing capacity. As of July 2, 2023, the Company had $1.7 million of letters of credit outstanding under the revolving credit facility. In February 2023, the Company entered into an amendment to its Credit Agreement which, among other things, contains a minimum liquidity financial covenant of $45 million, which includes unrestricted cash and any available borrowing capacity under the revolving credit facility. The amendment also increases the consolidated net leverage ratio financial covenant level applicable under the Credit Agreement as of the fiscal quarter ending April 2, 2023 through the fiscal quarter ending March 31, 2024, to initially 7.25:1.00, and provides for modified step-down levels for such covenant thereafter.
The Company is obligated under various operating leases for facilities, equipment and automobiles with estimated lease payments of approximately $3.8 million,including short term leases, due during the remainder of fiscal year 2023. See Note 16, "Lease Commitments" in the Notes to the Condensed Consolidated Financial Statements included elsewhere in this Quarterly Report on Form 10-Q for additional information related to the Company’s lease obligations.
Holley's capital expenditures are primarily related to ongoing maintenance and improvements, including investments related to upgrading and maintaining our information technology systems, tooling for new products, vehicles for product development, and machinery and equipment for operations. We expect capital expenditures in the range of $5 million to $10 million in fiscal year 2023.
See Note 7, "Debt" in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for further detail of our credit facility and the timing of principal maturities. As of July 2, 2023, based on the then current weighted average interest rate of 9.2%, expected interest payments associated with outstanding debt totaled approximately $29.6 million for the remainder of fiscal year 2023.
As discussed under “Business Environment” above, although the future impact of supply chain disruptions and inflationary pressures are highly uncertain, we believe that cash generated through our current operating performance, and our operating plans, cash position, and borrowings available under our revolving credit facility, will be sufficient to satisfy our liquidity needs and capital expenditure requirements for the next 12 months and thereafter for the foreseeable future.
Cash Flows
The following table provides a summary of cash flows from operating, investing, and financing activities for the periods presented (dollars in thousands):
26-week period ended April 2, 2023Compared With 26-week period ended April 3, 2022
For the twenty-six weeks ended | ||||||||
July 2, 2023 | July 3, 2022 | |||||||
Cash flows provided by operating activities | $ | 34,383 | $ | 20,831 | ||||
Cash flows used in investing activities | (2,382 | ) | (23,442 | ) | ||||
Cash flows used in financing activities | (15,572 | ) | (2,716 | ) | ||||
Effect of foreign currency rate fluctuations on cash | 161 | (443 | ) | |||||
Net (decrease) increase in cash and cash equivalents | $ | 16,590 | $ | (5,770 | ) |
Operating Activities. Net cash provided by operating activities for the 26-week period ended July 2, 2023 was $34.4 million compared to net cash provided by operating activities of $20.8 million for the 26-week period ended July 3, 2022. Net income decreased $40.2 million to $17.2 million for the 26-week period ended July 2, 2023 from $57.4 million for the 26-week period ended July 3, 2022. Significant changes in the year-over-year change in working capital activity included positive fluctuations from inventories of $41.2 million and accounts payable of $4.4 million. Partially offsetting these increases was a negative fluctuation in accounts receivable of $4.4 million The change in inventory reflects the impact of inventory management initiatives and fluctuations in sales while changes in accounts receivable and accounts payable are impacted by the timing of payments.
Investing Activities. Cash used in investing activities for the 26-week period ended July 2, 2023 was $2.4 million which primarily reflects capital expenditures. Cash used in investing activities for the 26-week period ended July 3, 2022 was $23.4 million which included $9.6 million due to capital expenditures and $14.1 million due to acquisitions.
Financing Activities. Cash used in financing activities for the 26-week period ended July 2, 2023 was $15.6 million, which primarily reflects principal payments on long-term debt and deferred financing fees. Cash used in financing activities for the 26-week period ended July 3, 2022 was $2.7 million due to principal payments on long-term debt.
Critical Accounting Estimates
Our consolidated financial statements are prepared in accordance with GAAP. The preparation of these consolidated financial statements requires managementus to make estimates, judgements and assumptions that affect the reported amounts of assets, liabilities, sales, expenses and liabilities, disclosurerelated disclosures. We evaluate our estimates, judgements and assumptions on an ongoing basis. Our estimates are based on historical experience and various other assumptions that we believe to be reasonable under the circumstances. Our actual results could differ from these estimates. For a discussion of contingent assets and liabilities atour critical accounting estimates, refer to the datesection entitled “Critical Accounting Estimates” in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023. For further information see also Note 1, “Description of the condensed financial statements,Business, Basis of Presentation, and income and expenses duringSummary of Significant Accounting Policies” in the periods reported. Actual results could materially differ from those estimates. WeNotes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. There have not identified anybeen no material changes to the Company’s critical accounting policies.estimates included in our Annual Report on Form 10-K for the year ended December 31, 2022.
Recent accounting standardsAccounting Pronouncements
ManagementFor a discussion of Holley’s new or recently adopted accounting pronouncements, see Note 1, “Description of the Business, Basis of Presentation, and Summary of Significant Accounting Policies,” in the Notes to the Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Interest Rate Risk. Holley is exposed to market risk in the normal course of business due to the Company’s ongoing investing and financing activities. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. Holley has established policies and procedures governing the Company’s management of market risks and the use of financial instruments to manage exposure to such risks. When appropriate, the Company uses derivative financial instruments to mitigate the risk from its interest rate exposure. The Company's interest rate collar is intended to mitigate some of the effects of increases in interest rates. As of July 2, 2023, a total of $645.6 million of term loan and revolver borrowings were subject to variable interest rates, with a weighted average borrowing rate of 9.2%. A hypothetical 100 basis point increase in interest rates would result in an approximately $1.5 million increase in annual interest expense, while a hypothetical 100 basis point decrease in interest rates would result in an approximately $6.5 million decrease to Holley’s annual interest expense.
Credit and other Risks. Holley is exposed to credit risk associated with cash and cash equivalents and trade receivables. As of July 2, 2023, the majority of the Company’s cash and cash equivalents consisted of cash balances in non-interest bearing checking accounts which exceed the insurance coverage provided on such deposits. The Company does not believe that any recently issued, butits cash equivalents present significant credit risks because the counterparties to the instruments consist of major financial institutions. Substantially all trade receivable balances of the business are unsecured. The credit risk with respect to trade receivables is concentrated by the number of significant customers that the Company has in its customer base and a prolonged economic downturn could increase exposure to credit risk on the Company’s trade receivables. To manage exposure to such risks, Holley performs ongoing credit evaluations of the Company’s customers and maintains an allowance for potential credit losses.
Exchange Rate Sensitivity. As of July 2, 2023, the Company is exposed to changes in foreign currency exchange rates. While historically this exposure to changes in foreign currency exchange rates has not yet effective, accounting standards, if currently adopted, would havehad a material effect on our condensedthe Company’s financial statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKcondition or results of operations, foreign currency fluctuations could have a material adverse effect on business and results of operations in the future. Historically, Holley’s primary exposure has been related to transactions denominated in the Euro and Canadian dollars. The majority of the Company’s sales, both domestically and internationally, are denominated in U.S. Dollars. Historically, the majority of the Company’s expenses have also been in U.S. Dollars and we have been somewhat insulated from currency fluctuations. However, Holley may be exposed to greater exchange rate sensitivity in the future. Currently, the Company does not hedge foreign currency exposure; however, the Company may consider strategies to mitigate foreign currency exposure in the future if deemed necessary.
Not required for a smaller reporting company.Item 4. Controls and Procedures.
ITEM 4. CONTROLS AND PROCEDURES
EvaluationBased on an evaluation under the supervision and with the participation of Disclosure Controlsthe Company’s management, the Company’s Chief Executive Officer and Procedures
DisclosureChief Financial Officer have concluded that the Company’s disclosure controls and procedures are controlsas defined in Rules 13a-15(e) and other procedures that are designed15d-15(e) under the Exchange Act were effective as of July 2, 2023 to ensureprovide reasonable assurance that information required to be disclosed by the Company in our reports filedthat it files or submittedsubmits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’sSEC rules and forms. Disclosure controlsforms and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is(ii) accumulated and communicated to ourthe Company’s management, including ourits Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
As required by Rules 13a-15 and 15d-15 under the Exchange Act, our Chief Executive Officer and Chief Financial Officer carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2020. Based upon their evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2020, our disclosure controls and procedures (as defined in Rules 13a-15 (e) and 15d-15 (e) under the Exchange Act) were effective.
Changes in Internal Control Overover Financial Reporting
There were no changes in ourthe Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) underof the Exchange Act) that occurred during the period covered by this reportmost recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, ourthe Company's internal control over financial reporting.
PARTPart II - OTHER INFORMATIONOther Information
ITEMItem 1. LEGAL PROCEEDINGS.Legal Proceedings
We are not currently a party to any material legal proceedings. From time to time, we are subject to litigation incidental to our business, as well as other litigation of a non-material nature in the ordinary course of business.
We operate in a changing environment that involves numerous known and unknown risks and uncertainties that could materially affect our operations. Factors that could materially affect our actual results, levels of activity, performance or achievements include, but are not limited to, those under the caption “Risk Factors” included in our Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023. Such risks, uncertainties and other factors may cause our actual results, performance, and achievements to be materially different from those expressed or implied by our forward-looking statements. If any of these risks or events occur, our business, financial condition or results of operations may be adversely affected.
There have been no material changes in the Company's risk factors from those disclosed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on March 15, 2023, except for the addition of the following risk factor:
Recent events affecting the financial services industry could have an adverse impact on the Company's business operations, financial condition, and results of operations.
The closures of certain regional banks have created bank-specific and broader financial institution liquidity risk and concerns. Future adverse developments with respect to specific financial institutions or the broader financial services industry may lead to market-wide liquidity shortages, impair the ability of companies to access working capital needs, and create additional market and economic uncertainty.
Although we do not have any funds in any of the banks that have been placed into receivership to date, we cannot guarantee that the banks or other financial institutions that hold our funds will not experience similar issues. These events have resulted in market disruption and volatility and could lead to greater instability in the credit and financial markets and a deterioration in confidence in economic conditions. Our operations may be adversely affected by any such economic downturn, liquidity shortages, volatile business environments, or unpredictable market conditions. These events could also make any necessary debt or equity financing more difficult and/or costly.
The future effect of these events on the financial services industry and broader economy are unknown and difficult to predict but could include failures of other financial institutions to which we or our customers, vendors, or other counterparties face direct or more significant exposure. Any such developments could adversely impact our results of operation and financial position. There may be other risks we have not yet identified. We are working to identify any potential impact of these events on our business in order to minimize any disruptions to our operations. However, we cannot guarantee we will be able to avoid any negative consequences relating to these recent developments or any future related developments.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
None.
Factors that could cause our actual results to differ materially from those in this Quarterly Report include the risk factors described in our final prospectus filed with the SEC on October 7, 2020. As of the date of this Quarterly Report, other than as described below, there have been no material changes to the risk factors disclosed in our final prospectus filed with the SEC.
The securities in which we invest the funds held in the Trust Account could bear a negative rate of interest, which could reduce the value of the assets held in trust such that the per-share redemption amount received by public shareholders may be less than $10.00 per share.
The proceeds held in the Trust Account are invested only in U.S. government treasury obligations with a maturity of 185 days or less or in money market funds meeting certain conditions under Rule 2a-7 under the Investment Company Act, which invest only in direct U.S. government treasury obligations. While short-term U.S. government treasury obligations currently yield a positive rate of interest, they have briefly yielded negative interest rates in recent years. Central banks in Europe and Japan pursued interest rates below zero in recent years, and the Open Market Committee of the Federal Reserve has not ruled out the possibility that it may in the future adopt similar policies in the United States. In the event that we are unable to complete our initial business combination or make certain amendments to our Amended and Restated Memorandum and Articles of Association our public shareholders are entitled to receive their pro-rata share of the proceeds held in the Trust Account, plus any interest income not released to us, net of taxes payable. Negative interest rates could impact the per-share redemption amount that may be received by public shareholders.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On October 9, 2020, we consummated our Initial Public Offering of 25,000,000 Units at a price of $10.00 per Unit, generating total gross proceeds of $250,000,000. J.P. Morgan Securities LLC and Jefferies LLC acted as the book-running managers. The securities sold in the offering were registered under the Securities Act on registration statements on Form S-1 (No. 333-248899). The registration statements became effective on October 6, 2020 and registered the sale of a maximum of 28,750,000 Units. Additionally, we granted the underwriters in the Initial Public Offering a 45-day option from October 6, 2020 to purchase up to 3,750,000 additional Units.
Simultaneously with the consummation of the Initial Public Offering, we consummated a private placement of 4,666,667 Private Placement Warrants to our Sponsor at a price of $1.50 per Private Placement Warrant, generating total proceeds of $7,000,000. Such securities were issued pursuant to the exemption from registration contained in Section 4(a)(2) of the Securities Act.
The Private Placement Warrants are identical to the Public Warrants underlying the Units sold in the Initial Public Offering, except that the Private Placement Warrants are not transferable, assignable or salable until 30 days after the completion of a Business Combination, subject to certain limited exceptions.
Of the gross proceeds received from the Initial Public Offering and the sale of the Private Placement Warrants, $250,000,000 (consisting of $245,000,000 of net proceeds from the Initial Public Offering, which amount includes $8,750,000 in the form of deferred underwriting commissions, and $5,000,000 of proceeds from the sale of the Private Placement Warrants) was placed in the Trust Account.
We paid a total of $5,000,000 in underwriting discounts and commissions and $465,163 for other costs and expenses related to the Initial Public Offering. In addition, the underwriter agreed to defer $8,750,000 in underwriting discounts and commissions.
For a description of the use of the proceeds generated in our Initial Public Offering, see Part I, Item 2 of this Form 10-Q.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.Defaults Upon Senior Securities
None.
ITEMItem 4. MINE SAFETY DISCLOSURES.Mine Safety Disclosures
Not applicable.
ITEMItem 5. OTHER INFORMATION.Other Information
None.Trading Plans
During the fiscal quarter ended July 2, 2023, no director or Section 16 officer adopted or terminated any Rule 10b5-1 trading arrangements or non-Rule 10b5-1 trading arrangements (in each case, as defined in Item 408(a) of Regulation S-K).
The following exhibits are filed as part of, or incorporated by reference into, this Quarterly Report on Form 10-Q.Item 6. Exhibits
# Indicates management contract or compensatory plan or arrangement.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Holley Inc. | ||
/s/ Jesse Weaver | ||
Jesse Weaver | ||
Chief Financial Officer (Duly Authorized Officer) | ||
August 10, 2023 | ||
18